IRA Distribution Planning Estate Planning And Sales Strategies

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IRA Distribution PlanningEstate Planning And
Sales Strategies

• Eva Victor, J.D., LL.M.
• The Penn Mutual Life Insurance Company

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Profile Client and Market Opportunity

• The Profile Client
• Estate With Significant Retirement Assets
  (Qualified Plans, IRAs, IRA Rollovers).
• Assets Exceeding Federal Estate Tax Exemption.
• Desire To Minimize Income And Estate Taxation And
  Maximize Legacy For Heirs.
• The Market Opportunity
• 11 Trillion In Qualified Retirement Plans And
  IRAs.
• 300 Billion In IRA Rollovers From 401(k) Plans.
• The IRA Is Often The Largest Asset And Most
  Significant Asset Of An Estate - And Increasing
  As A Percentage Of Many Estates.

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How Can Life Insurance Enhance IRA Distribution
Planning ?

• Life Insurance Plays A Vital Role In IRA
  Distribution And Estate Planning In Providing
• Liquidity To Pay Income, Estate Or Inheritance
  Taxes.
• Wealth Replacement Bequest In Coordination With A
  Charitable Bequest.
• Equity Of Inheritance Bequest.
• Leveraged Legacy For Heirs.
• Proceeds From A Properly Structured Policy Pass
  Free Of
• Federal Income Tax.
• Federal Estate Tax.
• Federal GST Tax.

4
How Can Life Insurance Enhance IRA Distribution
Planning ?

• Lifetime Required Minimum Distributions Must
  Begin At Age 70 ½.
• Lifetime Distributions After Age 59 ½ Are Free Of
  Penalty Tax.
• Lifetime Distributions Can Fund Premiums On A
  Policy Positioned Outside The Taxable Estate
• Irrevocable Life Insurance Trust (ILIT).
• Flexible ILIT Alternatives . . .
• Spousal Access ILIT.
• Flexible ILIT.
• Dynasty Trust.
• Credit Shelter Trust.
• Survivorship Standby Trust (SST).

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Planning And Sales Strategies
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Prospects

• Husband (Age 73) Wife Age (Age 71).
• Net Assets 5,000,000
• Husbands IRA 1,000,000 Annual Growth 8.
• Federal Income Tax Rate 35 Federal Estate Tax
  Rate 45.
• Heirs Son (Age 50) Daughter (Age 47)
  Grandchildren (Ages 28, 26, 24, 20).
• Planning Objectives Implement Cost Effective
  And Tax Efficient Planning And Liquidity Funding
  To Preserve Value Of IRA
• Explore Testamentary Distribution Strategies For
  IRA To Maximize Value Passing To Heirs.

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What Taxation Is An IRA Subject To Upon
The Owners Death ?

• An Important Aspect Of Estate Planning Centers
  Around Testamentary IRA Distribution Strategies .
  . .
• Efficient Planning Which
• Defers Or Mitigates Taxation.
• Enhances Legacy For Heirs.
• IRAs And IRA Rollovers Can Experience
  Considerable Erosion At Death Due To A
  Combination Of . . .
• Federal Income Tax.
• Federal Estate Tax.
• Federal Generation-Skipping Transfer (GST) Tax.
• State Estate, Inheritance And Income Taxes.

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How Quickly Must An IRA Be Distributed Upon The
Owners Death ?

• Opportunity For Continued Income Tax Deferral . .
  .
• Depends Upon Chosen Beneficiary (e.g., Spouse,
  Non-Spouse, See Through Trust, etc)
• Certain Distribution Rules Apply If The IRA Owner
  Dies Before Required Beginning Date.
• Different Distributions Rules Apply If The IRA
  Owners Death Occurs After Required Beginning
  Date.
• Required Beginning Date Is 04/01 Following Year
  The Owner Reached Age 70 ½.
• Note, Financial Institutions Are Not Required To
  Offer All Distributions Options Available Under
  IRS Rules.

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What Are The Distribution Options For A Spousal
Beneficiary ?

• Owner Dies Before Required Beginning Date . . .
• Spouse Sole Beneficiary Or Separate Account
  Established For Spouse (If Spouse Not Sole
  Beneficiary)
• 5 Year Rule - Distributed Within Five Years Or
• Spousal Rollover - Spouse Becomes New IRA Owner
  With Required Distributions Applicable To Living
  IRA Owner Or
• Stretch - Spouse Remains Decedents IRA
  Beneficiary With Distributions Based On Spouses
  Single Life Expectancy, Recalculated Annually
  (Non- Recalculated, If No Separate Account For
  Spouse).
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death Or By 12/31 Of Year
  Owner Would Have Reached Age 70 ½.

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What Are The Distribution Options For A Spousal
Beneficiary ?

• Owner Dies After Required Beginning Date . . .
• Spouse Sole Beneficiary Or Separate Account
  Established For Spouse (If Spouse Not Sole
  Beneficiary)
• Spousal Rollover - Spouse Becomes New IRA Owner
  With Required Distributions Applicable To Living
  IRA Owner Or
• Stretch - Spouse Remains Decedents IRA
  Beneficiary With Distributions Based On Spouses
  Single Life Expectancy, Recalculated Annually
  (Non- Recalculated, If No Separate Account For
  Spouse).
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death Or By 12/31 Of Year
  Owner Would Have Reached Age 70 ½ (Can Be Based
  On Longer Of Beneficiarys Or Decedents
  Remaining Life Expectancy).

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What Are The Distribution OptionsFor A
Non-Spousal Beneficiary ?

• Owner Dies Before Required Beginning Date . . .
• Non-Spousal Beneficiary Or Separate Accounts
  Established For Multiple Beneficiaries
• 5 Year Rule - Distributed Within Five Years Of
  Owners Death Or
• Stretch - Distributions Based On Beneficiary's
  Single Life Expectancy, Nonrecalculated Annually.
• If Separate Accounts Are Not Established For
  Multiple Beneficiaries, Distributions Are Based
  Upon Oldest Beneficiary's Life Expectancy.
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death.

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What Are The Distribution OptionsFor A
Non-Spousal Beneficiary ?

• Owner Dies After Required Beginning Date . . .
• Non-Spousal Beneficiary Or Separate Accounts For
  Multiple Beneficiaries
• Stretch - Distributions Based On Beneficiary's
  Single Life Expectancy, Non-Recalculated
  Annually.
• If Separate Accounts Are Not Established For
  Multiple Beneficiaries, Distributions Are Based
  Upon Oldest Beneficiary's Life Expectancy.
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death (Can Be Based On Longer
  Of Beneficiarys Or Decedents Remaining Life
  Expectancy).

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What Are The Distribution OptionsFor A
See-Through Trust ?

• Owner Dies Before Required Beginning Date . . .
• 5 Year Rule - Distributed Within Five Years Of
  Owners Death Or
• Stretch - Distributions Based On Beneficiary's
  (Or Oldest Trust Beneficiary's) Single Life
  Expectancy, Nonrecalculated Annually.
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death.
• Owner Dies After Required Beginning Date . . .
• Stretch - Distributions Based On Beneficiary's
  Single Life Expectancy, Nonrecalculated Annually.
• Distributions Must Begin By 12/31 Of Year
  Following Owners Death (Can Be Based On Longer
  Of Beneficiarys Or Decedents Remaining Life
  Expectancy).

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What Are The Distribution OptionsFor No
Designated Beneficiary ?

• A Designated Beneficiary Can Only Be An
  Individual With A Life Expectancy.
• If No Designated Beneficiary, (e.g., Non-See
  Through Trust, Estate, Charity, etc) . . .
• If Owner Dies Before Required Beginning Date
• 5 Year Rule - Distributed Within Five Years Of
  Owners Death.
• If Owner Dies After Required Beginning Date
• Distributions Based On Decedents Remaining Life
  Expectancy, Nonrecalculated Annually.

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Why Would A Beneficiary Consider Disclaiming An
IRA ?

• Disclaimer By Spousal Beneficiary In Favor Of
  Non-Spousal Beneficiary (e.g., Child, Grandchild)
  In Order To
• Fully Fund The Decedent's Estate Tax Exemption
  (e.g., Credit Shelter Trust).
• Fund A Charitable Bequest.
• Reduce Estate Taxes.
• Disclaimer By Oldest Of Multiple Beneficiaries
• Enables The Younger Beneficiaries To Use Their
  Longer Life Expectancies To Determine Their
  Required Minimum Distributions.

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Why Would A Beneficiary Consider Disclaiming An
IRA ?

• Disclaimed Benefit Passes To Contingent
  Beneficiaries.
• In Order To Avoid Making A Gift To The Other
  Beneficiaries, The Disclaiming Beneficiary Must
• Execute And File Qualified Disclaimer Within 9
  Months Of Owners Death
• Disclaim Prior To Designated Beneficiary
  Determination Date (September 30th Of Year
  Following Owners Death)
• Not Accept Any IRA Benefits Prior To Making The
  Disclaimer And
• Meet All Applicable State And Federal
  Requirements.

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Scenario 1

• Stretch IRA Legacy Enhanced With Life
  Insurance

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Stretch IRA Legacy
Enhanced With Life Insurance

• Life Insurance Planning Coupled With Tax
  Planning.
• Life Insurance Proceeds Pay Estate Taxes On IRA
  (So IRA Doesnt Have To)
• Sets Stage For Years Of Tax Deferred Compounding
  Growth For IRA.
• Keeps As Much Of IRA As Possible In Tact So
  Maximum Amount Can Be Stretched By
  Beneficiaries.
• Allows Beneficiaries To Stick With Their Stretch
  Schedules Instead Of Depleting The IRA Before
  Its Time.

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Example Stretch IRA And Life Insurance

• IRA Value Upon Second Death (Wifes Death)
  1,464,938.
• Proposed Life Insurance To Pay Federal Estate
  Taxes On IRA 659,222 Annual Premium 16,310.
• Stretch IRAs For Children (732,469 Each)
• Net Distributions To Daughter Over Remaining Life
  Expectancy (Age 85) 1,513,855.
• Legacy To Daughters Heirs 9,150.
• Net Distributions To Son Over Remaining Life
  Expectancy (Age 85) 1,321,240.
• Legacy To Sons Heirs 14,497.
• Total Stretch Legacy To Heirs 2,858,742.

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Scenario 2

• Stretch IRA Legacy For Children
  Life Insurance Legacy For Spouse

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Stretch IRA Legacy For Children
And Life Insurance Legacy For Spouse

• The Surviving Spouse Is A Common IRA Beneficiary.
• Under Some Circumstances, It May Be A Better
  Strategy To Pass The IRA To A Younger Beneficiary
  Upon The Owners Death (e.g., Child Or
  Grandchild)
• A Younger Beneficiary Has Greater Opportunity For
  Stretch - Decades Of Tax Deferred Growth And
  Enhanced Legacy.
• The Surviving Spouse Can Instead Receive An
  Equivalent Life Insurance Bequest To Ensure
  Survivor Resources
• Proceeds Pass Income Tax Free
• Proceeds Pass Estate Tax Free If Spouse Owns
  Policy Or Is Policy Beneficiary (Unlimited
  Marital Deduction).

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Example Stretch IRA For Children
And Insurance For Spouse

• Value Of IRA Upon First Death (Husbands Death)
  At Age 85 1,424,886.
• Stretch IRA Legacy For Children (712,443 Each)
• Net Distributions To Daughter Over Remaining Life
  Expectancy (To Age 85) 1,611,104.
• Legacy To Daughters Heirs 3,675.
• Net Distributions To Son Over Remaining Life
  Expectancy (To Age 85) 1,404,942.
• Legacy To Sons Heirs 10,260.
• Total Stretch Legacy To Heirs 3,029,981.
• Income And Estate Tax Free Insurance Legacy To
  Surviving Spouse Upon Husbands Death
  1,424,886 Annual Premium 41,795.

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Scenario 3

• Insurance To Provide Liquidity For Roth IRA
  Conversion

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Life Insurance Legacy To Provide Liquidity For
Roth IRA Conversion

• Proceeds Provide Liquidity To Pay Income Taxes
  And Enable Surviving Spouse To Complete A Roth
  Conversion.
• Once Spouse Converts Traditional IRA To Roth IRA
• IRA Is Not Subject To Required Minimum
  Distributions.
• Withdrawals Are Income Tax Free.
• Surviving Spouse Inherits IRA Without Estate Tax
  (Unlimited Marital Deduction).
• Children Can Inherit Roth IRA Upon Surviving
  Spouses Death
• Subject To Required Minimum Distributions
• Distributions Income Tax Free.
• Life Insurance Can Solve Liquidity Need Upon
  Surviving Spouses Death, If IRA Is Subject To
  Estate Tax.

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Combined Charitable And Life Insurance Legacies

• Life Insurance Can Be Used To Create Or Replace
  Wealth In Coordination With Charitable Planning .
  . .
• Charitable Bequest Of IRA To Charity
• Eliminates Income Tax On An IRD Asset.
• Wealth Replacement Life Insurance Legacy For
  Heirs.
• Charitable Bequest Of IRA To Heirs
• Stretch Provides Opportunity To Build Income
  Tax Deferred Legacy.
• Creates Leveraged Life Insurance Legacy For
  Charity (Spread Between Premiums And Proceeds).
• Generates Charitable Income Tax Deduction For
  Premiums (If Charity Owned Policy).

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Scenario 4

• CRT Legacy Combined With Wealth Replacement
  Insurance Legacy

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Combined CRT Legacy With Wealth Replacement Life
Insurance Legacy

• A Testamentary Charitable Remainder Trust (CRT)
  Can Compare Favorably With A Stretch IRA
• CRT Term Can Provide Distributions Based Upon One
  Or More Individuals Lifetimes (Actual Years
  Lived)
• Stretch Cannot Extend Distributions Beyond The
  Life Expectancy Of One Individual.
• CRT Income Beneficiaries Are Not Subject To
  Required Minimum Distributions.
• NIMCRUT Defers Distributions (And Income Tax)
  Longer.
• When Charity Receives The CRT Remainder Interest,
  Heirs Receive Equivalent Legacy In Life Insurance
  Proceeds
• Proceeds Pass Free Of Federal Income Tax (Unlike
  IRA).
• Proceeds Pass Free Of Federal Estate Tax (Unlike
  IRA), Provided Policy Is Third Party Owned (e.g.,
  ILIT).

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Example CRT And Wealth Replacement Legacy

• IRA Value Upon Second Death (Wifes Death) At Age
  85 1,464,938.
• NIMCRUTs For Children (732,469 Each)
• NIMCRUTS Are IRA Beneficiaries.
• Trust Terms Are Based Upon Each Income
  Beneficiary's (Childs) Lifetime.
• Children Receive 8 Annual Payments (Deferred
  Until Age 70)
• Total Net Income To Daughter (Age 85)
  4,558,266.
• Total Net Income To Son (Age 85) 3,667,589.
• Value To Charity Following Trust Term
  8,225,855.
• Wealth Replacement Life Insurance Legacy To
  Children's Heirs.

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Scenario 5

• Life Insurance Legacy
  In Lieu Of IRA Legacy

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Life Insurance Legacy In Lieu Of IRA Legacy

• Powerful Leverage Of IRA Funds.
• Tax Efficiency
• Unlike An IRA, Proceeds From A Properly
  Structured Life Insurance Policy (e.g., ILIT
  Owned) Pass Free Of Federal Estate And Income
  Taxes.
• After Age 70 ½ Mandatory Distributions Must
  Begin Distributions After Age 59 ½ Are Free Of
  Penalty Tax.
• It May Make Sense To Consume IRA To Pay Premiums,
  Particularly If
• There Are Sufficient Other Non-IRA Assets
• IRA Funds Are Not Needed
• IRA Would Likely Be Consumed To Pay Income Or
  Estate Taxes Following The Owners Death.

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Example Insurance Legacy

• IRA Legacy
• IRA Value Upon Second Death (Wifes Death)
  1,464,938.
• Net IRA Value After Income And Estate Taxes
  523,715.
• Life Insurance Legacy Alternative
• Liquidate 1,000,000 IRA To Fund Premium.
• Single Pay Premium 650,000 (After Income
  Taxes).
• Survivorship Life Insurance Legacy To Children
  3,000,000 Level Death Benefit
  (2,350,000 Net After 650,000 Premium).
• Source Of Premium
• IRA Funds vs. Non-IRA Funds.

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Opportunity For The Financial Advisor

• The IRA (Or IRA Rollover) Is Often The Largest Or
  Most Significant Asset Of An Estate.
• Many Of Your Clients Have Sizable IRAs - Huge
  Market!
• Other Professional Advisors May Not Have
  Addressed The IRA In The Estate Plan.
• Presents Great Opportunity For The Financial
  Advisor - Enabling You To Enhance Your Value And
  Relationship.
• Wide Range Of Clients Goals And Objectives Can
  Be Accomplished With Combining Both Tax Planning
  And Life Insurance Funding.
• Do Something Now While Client Is Living And
  Broader Planning Options Still Exist !

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• This presentation has been prepared
  based on Penn Mutual's current understanding of
  federal estate, gift, GST and income tax laws.
  Any changes in these laws may result in a
  conclusion different than what is represented.
  Please consult qualified legal and tax advisor
  regarding the clients specific situation.
• Please note that an irrevocable trust
  is a legal arrangement that may result in the
  inability to change the trust in the future,
  requires relinquishing control over the trust
  assets, must be properly administered, and has
  other significant consequences. Before
  implementing any plans based on specific
  circumstances and objectives, the client should
  consult with a personal legal, tax, and financial
  advisor.
• Penn Mutual
  Life Insurance Company
• 600 Dresher
  Road, Horsham PA 19044
• 
  215-957-7300