Wealth Transfer is often overlooked in many retirement plans.
Wealth Transfer is often overlooked in many retirement plans and this is unfortunate because how to leave more money to your heirs is a very important aspect of your overall plan. The first obligation of retirement resources is of course adequate funding of retirement income needs. However, it is possible to protect retirement income assets as well as position them to maximize the wealth you can leave behind.
Avoiding the Annuity Tax Trap
Over 80% of deferred annuities are never used during life and are in fact transferred at death benefit. Earning from an annuity are tax deferred if they are not distributed. This creates a tax back log as interest compounds year after year after year inside an annuity with no taxes paid.
The dirty little secret about deferred annuities is that all those taxes are due at death. Annuities are an insurance product and as such they by-pass probate at death and become the property of the beneficiary. The IRS calls that a taxable event and taxes the deferred earnings in the current taxable year and at the tax bracket of the beneficiary. In other words, all that leftover retirement capital shrinks.
If all your annuity cash values are liquidated during life and used to produce lifetime income guarantees, then this tax catch-up is not a concern, because the deferred taxes will be paid as the distributions occur throughout your retirement. However, this is not what happens in numerous retirement plans. Many retirees with excess assets overfund their annuities and the unused capital is taxed away the moment it is handed to their heirs.
Single premium life policies are taxed exactly like a deferred annuity during life, but have a tax free death benefit. This makes them an ideal funding alternative to tax deferred annuities. In addition to the tax free nature of the transfer, they also increase the amount transferred because they have a life insurance component.
Passing Even More Wealth
Another wealth transfer strategy for retirement estates with excess assets is to purchase a traditional permanent life insurance product. Some financial professionals view life insurance as a low yield product. This is true concerning guaranteed cash values, but not necessarily true when dividends or excess interest earnings are added in. However, the annual return within the policy is secondary, if our intent is to balloon the estate at death.
When used as a wealth transfer vehicle, the year to year return on life insurance is immaterial because our goal is total return at the time of transfer. When the return on a life policy is calculated on the total after tax amount transferred to the next generation, the yields are more than competitive. Even when individuals live well past their life expectancy, the returns are still impressive when compared to almost all other asset classes.
Ask How to Avoid the Annuity Catch-up Tax and Increase the Wealth You Can Transfer.
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Compliance # CSP_10450 20160601