by Rich Schlueter
Something we often observe among client couples who are nearing retirement, or those who are already enjoying retirement, is that a significant portion of the couples’ qualified assets (IRA's 401(k)'s, etc.) are in only one person’s name.
Let's assume for a moment that in this case, the assets are in the husband’s name, that the couple is of similar age, and that neither has a significant health concern. In this case, mortality tables indicate that the husband will likely die prior to the wife, in which case the widow, more often than not, will inherit the husband’s assets, including qualified accounts.
Strict distribution rules associated with qualified accounts can be restrictive and income taxation can dramatically reduce the widow’s net income.
With the ability of heirs to stretch IRAs, an alternative planning technique may be worthy of consideration.
Let's assume in our example that the husband has a $400,000 IRA, that his wife is the primary beneficiary, and that the children are contingent beneficiaries. Consideration could be given to the wife purchasing a $400,000 life insurance policy on the husband wherein she would be the beneficiary. At the husband’s death, the widow would receive a $400,000 tax-free cash asset. The wife could then choose to disclaim the IRA assets, at which time they would pass to the children. The children would then be able to stretch distributions over their lifetimes.
- Widow does not have to deal with complex distribution planning and avoids paying income tax on IRA distributions
- Tax-free cash asset to the widow with no distribution or investment restrictions
- The children will benefit earlier than otherwise
- The IRA will provide more income over the course of the children's lives than it would over the widow's life due to smaller distribution requirements which encourages tax-deferral.