The Roles of Life Insurance in Estate Planning for IRAs

1. Spouse IRA Rollover Enhanced With Life Insurance
Upon your death, your spouse can assume ownership of your existing IRA or rollover your IRA into a new IRA in your spouse's name. While distributions prior to age 59 1/2 may be subject to a premature distribution penalty tax, as the new IRA owner, your spouse has the opportunity to defer distributions and income tax until reaching age 70 1/2. The unlimited marital estate tax deduction will also defer estate taxes until your spouse's death. A properly structured life insurance policy can then supply a source of liquidity to cover estate and income taxes upon your spouse's death.

2. Stretch IRA Legacy Enhanced With Life Insurance
The stretch or inherited IRA strategy can set the state for many years of income tax deferred growth for your IRA beneficiaries. Life insurance proceeds can ensure sufficient liquidity to pay estate and income taxes, so your beneficiaries won't have to invade the IRA beyond their required minimum distributions. Ensuring sufficient liquidity enables your beneficiaries to keep the IRA intact, and comply with their stretch schedules, so the maximum amount can accumulate and build a larger legacy over time.

3. Stretch IRA Legacy for Children and Life Insurance Legacy For Spouse
In some situations, it may be more desirable to pass your IRA to a younger child or grandchild who may have a greater opportunity for income tax deferral using the stretch technique. A life insurance legacy can instead be provided for your spouse to replace the value of the IRA, and ensure equity of inheritance. Your spouse's life insurance bequest will be received free of income tax, and free of federal estate tax due to the unlimited marital estate tax deduction.

4. Charitable Remainder Trust For IRA With Wealth Replacement Life Insurance Legacy
A testamentary Charitable Remainder Trust (or CRT)created under your Will can be the beneficiary of your IRA, reducing or eliminating income and estate taxes. The CRT can ensure lifetime income for your surviving spouse, children or other heirs, as well as a legacy for charity - the CRT remainder beneficiary. The benefits of a CRT can compare favorably with a stretch IRA, and can be designed with a feature allowing the income beneficiaries to defer their distributions and taxation until desired - without required minimum distributions. A life insurance legacy can then replace the value of the charity's remainder interest for your heirs.

5. Life Insurance Legacy in Lieu of IRA Legacy
In some cases, it may practical and economic sense to utilize your IRA to fund an alternative life insurance legacy for your heirs - particularly if you own sufficient other assets, and you won't need your IRA. This strategy can represent a powerful leverage of IRA funds. The proceeds from a properly structured policy pass free of federal income, estate and GST tax - unlike an IRA. After you reach age 70 1/2, required minimum distributions must begin, and distributions after age 59 1/2 are free of penalty tax. Your lifetime distributions can also be used to fund premiums on a policy that complements your estate and distribution planning strategy for your IRA.