Life Insurance Permissible IRA Investment?

[JWK]

65 year old female has $40,000 invested in traditional IRA with a basis of $8,000. She does not need this money for expenses and does not want to take MRDs at 70.5. Assume her estate is less than the unified credit equivalent, so only concern is income tax. Can she purchase a whole life insurance policy, naming children as beneficiaries, to allow for tax-free transfer of IRA proceeds upon her death?

[Michael Devault]

Sorry, but life insurance is not a permissible investment for IRAs. About all she can do is take distributions, pay tax on them, and use the net after tax value of the distribution to purchase the life policy. Maybe a limited pay policy (5-7 years) would help spread out the taxes.

Keep in mind that if premiums are paid over less than 7 years, the policy will likely be a modified endowment contract (MEC), causing withdrawals to be taxed much like an annuity. But, the death benefits will be income tax free.

[John Olsen]

It is possible that this woman could take distributions from the IRA now, pay tax on same, buy life insurance with the net (or, if the Federal Estate Tax is an issue, gift the net to an ILIT and have the ILIT buy insurance on her life), and the NET wealth transferred to heirs will be greater than it will be (given assumptions) in the present scenario.

It's also possible that the reverse will be true. I've done a LOT of analyses of this type, and the big factors appear to be (a) Federal Estate Tax - the more FET, the better this "end run" technique works. It often does NOT work well if there is no FET liability (B) growth rate assumed on the IRA and on the insurance death benefit (if any), and © the insurance rate she can qualify for.

Some insurers offer this type of analysis, but I've seen some that leave a LOT to be desired in the way of precision (not to say "honesty"). A program called "catalyst" is perhaps the clearest and easiest illustration of this technique I've yet seen. It's the brainchild of Ron and Scott Thevenot, and info on same is available on www.catmarkinc.com.

As was noted, life insurance cannot be purchased with IRA money. A purported way around this is currently being touted, using a FLP, and relying VERY heavily on the scanty authority of the Swanson case. In my opinion, the idea ranks right up there with Charitable Reverse Split Dollar.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[BPickerCPA]

John,

Wouldn't the date of death also play a big part in the ultimate result?

I tell estate planning clients that I can give them the perfect estate plan if they give me one piece of information. Their date of death. My friend Ed tells people at seminars that if they want to know that piece of information, he can arrange it through his friends at Mutual Of Brooklyn.

What a sick bunch we are!

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Barry Picker, CPA/PFS, CFP

New York, NY

[JWK]

Thanks to all for the insightful comments. By the way, I hear that Mutual of Brooklyn has a great training program.