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One “Tax-Free” Strategy The IRS Hopes You Never Discover

August 11, 2012

    by John Bearss (C.A.R. Financial Advisor)

    If I were to tell you that there are three beneficiaries to your estate and those beneficiaries could be: your family, your favorite charity, or the IRS, which two would you pick?

    While the answer should be obvious, many people fail to create a plan that will minimize their taxes upon their passing. So this week, let’s explore a strategy that could help you cut out the tax man, further the Kingdom of God and still not disinherit your children.

    Let’s take a couple named Bill and Nancy.

    Bill had a large 401(k) where he worked as a salesman. Bill and Nancy had enough income to take care of them through the rest of their lives and only needed a portion of the 401(k) to meet their income needs. With the remaining portion of the 401(k) they had a strong desire to give to their church. Therefore, I suggested a strategy that would pass the inheritance to their children and their church while leaving the IRS out. Because the tax time bomb does not go off until both Bill and Nancy pass away, this strategy made a lot of sense to them. After all, as long as one of them is alive, they are exempt from paying estate taxes because of the marital exclusion allowance.

    So here is what Bill and Nancy did.

    First, they rolled the remaining portion of the 401(k) asset to an IRA.

    Second, they named their church as the beneficiary of the IRA. 

    Next, they placed the IRA money into an investment vehicle that provided a stable income stream that was guaranteed to pay an regular monthly income as long as either Bill or Nancy was still living.

    They were sure to withhold enough money from their monthly income to cover any taxes due. But with the remaining amount of the monthly income, they bought a second to die life insurance policy that insured the lives of both Bill and Nancy to equal the value of the IRA. They named their children as the beneficiaries of the life insurance policy.

    So, here is the scenario: Since Bill and Nancy named the church as the beneficiary of their IRA, the church will receive whatever is left in the IRA upon their passing. And because the church is a charity, they will pay no taxes upon the gift. And because the children were named as the beneficiaries of the second to die life insurance policy, Bill and Nancy’s children will also receive an income tax free death benefit. Why is the money that paid out to their children considered tax-free? Because, the Federal and State governments do not require income taxes to be paid on proceeds from a death benefit of a life insurance policy.

    Pretty sweet, huh?

    Finally, because the value of Bill and Nancy’s estate exceeded $1 million dollars (because of the second to die life insurance policy death benefit), we incorporated the use of an irrevocable life insurance trust (ILIT) in order to keep the death benefit of the life insurance policy out of their estate. By using the ILIT, we were able to bring their total estate to just below $1 million dollars. At this level, there will be no federal estate taxes owed upon their passing.

    So by using the combination of a guaranteed income investment, life insurance, and a trust, we were able to give not just part, but ALL of the inheritance to the family and the charity. And the best part: Not a dime went to Uncle Sam!

    Bill and Nancy are my clients. Over the last 25+ years, I have helped numerous people just like Bill and Nancy minimize their tax liabilities and maximize their incomes and estates.

    Want to speak with a trusted financial advisor?

    Schedule a free consultation here


    Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. John Bearss is a retirement specialist.  He is also a registered representative of and offers securities through SICOR Securities, Inc., Member FINRA, MSRB, SIPC, 6500 Poe Avenue, Suite 105, Dayton, OH 45414 | (937) 890.3101. Neither SICOR Securities, Inc., Lifetime Decisions Management nor their representatives provide legal or tax advice. Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. and SICOR Securities, Inc. are not affiliated.

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