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How to Pass Your Wealth On to Your Heirs

Shielding Your Estate from Taxes Using Annuities and Life Insurance

The growth of IRA funds accumulated for retirement now exceeds more than $4.75 trillion in the U.S. This figure is sure to increase over the coming years as age and retirement planning come to the forefront for a larger segment of the population.

In many cases, people who have no use of an IRA account for retirement income may have the intention of passing these funds onto their heirs, but are unaware of the tax consequences that may ensue.

While the initial contributions and earnings growth are tax deferred, the distribution is another matter entirely. Because the money used to create the IRA was never taxed, an IRA distribution is subject to income tax and, as a large portion of a person’s estate, may also be subject to estate taxes, increasing the tax burden. This is where a knowledgeable adviser can be a real asset.

Additional Advantages with

Life Insurance

The easiest way to pass wealth on to the next generation is through the use of life insurance. This vehicle carries two main advantages in the transfer of wealth; first, life insurance benefits are tax-free to the beneficiary, and second, the increase of cash value is tax-deferred.

Taking Advantage of Your IRA

One way in which you can pass more of your estate on to your heirs is by using your IRA. You can use the funds in the IRA to purchase a fixed annuity, and then use the income stream from the annuity to purchase life insurance. The annuity is set up for guaranteed lifetime income in order to assure the ongoing maintenance of the life-insurance policy.

Calculate the amount of income needed to purchase the insurance, taking into account the affects of taxation. The after-tax income is used to pay the policy premiums, with the heirs named as the beneficiary for the life-insurance policy.

At the time of death, the annuity has no value; therefore there are no taxes due. The death benefits are paid to the beneficiary tax-free. Compare this to a situation with no planning, and the IRA being fully taxable at death, and it’s easy to see the benefits.

You will, of course, be paying income taxes on the annuity income, but with the estate taxes eliminated, the end result should be a tax burden much lower than the combined income tax and estate tax that would be in effect without the proper planning.

Create a Trust Account

Finally, the establishment of the insurance policy should be done within a trust in order to avoid the inclusion of the death benefits as part of one’s estate.  There are additional tax and legal issues that should be considered.

If you are interested in this concept, you should consult an attorney and tax advisor specializing in estate planning to ensure that your financial plan is structured to meet your particular situation and objectives.

Marco Amato is the President of Dowd Financial Services, LLC and has been in the financial-service business for more than 30 years. Dowd Financial Services is a full-service financial division of the Dowd Agencies, with more than 50 years of combined monetary experience. The Dowd Agencies has four offices in Western Mass. Amato can be reached at (413) 538-7444;[email protected]

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