One Way to Create Income for Life and a Guaranteed Inheritance for Your Kids

Jim was a retired corporate lawyer, married with two grown kids and one year from turning 70.5 — the age when he’d have to take his first IRA required minimum distribution. The thing is, Jim didn’t need the money from his RMD.

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Both he and his wife had generous pensions, Social Security and a comfortable enough cushion of other stocks and bonds that met their needs without tapping into his IRA, which was worth about $600,000. In addition, they had planned carefully for their living expenses, possible long-term care needs and future health care needs.

Instead of looking for retirement income planning, Jim wanted to maximize what he could leave his children, who were both on their own and gainfully employed but just starting out in modest-paying jobs. He was gifting some stock and cash to help them day-to-day but wanted to do more for them later on.

Here’s how we more than doubled the kids’ inheritance from $600,000 to $1.3 million.

To maximize what Jim could leave his kids, I suggested he use his RMD to purchase life insurance. Life insurance could provide an immediate, income tax-free inheritance for his kids should he pass away. Unfortunately, Jim was uninsurable — with a history of cancer and insulin injections, there was no way he would qualify. However, Susan, his wife, was healthy and younger — a double bonus. Jim’s RMD in year 1 was $21,000, but we decided to plan for $25,000 to purchase more insurance. Susan used that $25,000 RMD withdrawal to purchase a life insurance policy on her life with a death benefit of $1,301,755, effectively doubling today what he could leave his kids.

But the plan didn’t stop there. Jim had concerns about meeting the insurance payment — after all they would have to pay premiums on the policy for their lifetime (a 20-year pay option was available for a smaller death benefit). To satisfy his concerns of paying the premium every year, I suggested he purchase an annuity inside his IRA to provide the guaranteed income needed to pay the premium. A $600,000 annuity would pay 5.1% for both of their lives, or $30,000 of income per year, which was more than enough to satisfy the insurance premium and his RMD.

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All in all, Jim and Susan were extremely satisfied. They could have done nothing and let the IRA stay in stocks and bonds, and maybe it would have doubled on its own over time. But we took the uncertainty out of his planning. The insurance created an immediate income tax-free estate for his kids, and the annuity provided the funding — the whole plan was now on autopilot. Jim and Susan were free from worrying about how to provide for their kids and could now spend more time enjoying their retirement.

If this type of plan sounds like it might be for you, here are a couple things you should consider:

• Be sure to have enough other money to live on. The client mentioned here had ample other money and pensions so they did not need their IRA RMD.
• Also, this works for conservative investors who want to take the guesswork out of planning. This couple did not want to take stock market risk with their kids’ inheritance.

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Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.

Investment advisory and financial planning services are offered through Summit Financial, LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken.

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