Situation:
- In their younger years, your client put as much money as they could into qualified savings vehicles
- Now that your client is nearing retirement, they may find that they do not need all of these assets to supplement their retirement income
- Your client is more concerned with leaving a legacy to heirs
- At age 70 ½, your client must start taking Required Minimum Distributions (RMDs)
- Assets can become taxed twice at death; by income taxes in respect of a decedent (IRD taxes) and by estate taxes
- Qualified assets do not receive a “step-up” in basis at death like other assets, such as stock or real estate
Solution:
Qualified Plan Maximization (QPlan Maximization) is a way for your clients to move assets from their qualified plan and use them to fund an Irrevocable Life Insurance Trust (ILIT). When drafted properly, this ILIT can purchase life insurance on the client and potentially increase the amount of money left to heirs.
Your client takes a withdrawal from the qualified plan and pays income tax. Then, the client makes a gift of the after-tax withdrawal to the ILIT. The ILIT purchases a life insurance policy on the client. If properly set up, at death the ILIT will receive the death benefit free of estate and income tax, creating a legacy for heirs.
Benefits:
- Reduces market risk during volatile times
- Removes assets from taxable estate
- Increases legacy to heirs
Considerations:
- Client must stay below annual exclusion gift and lifetime exclusion thresholds to avoid gift tax
- Clients who have not yet reached age 59 ½ will generally be subject to a 10% IRS penalty on any withdrawals they take