Powerful Estate Planning Technique

Posted by David Fevergeon - December 29, 2010 - Tips & Advice - No Comments

Considering the upcoming changes to potential Estate Tax law, I figured I would highlight an interesting estate planning technique that can be a powerful tax-saving strategy for the right individual(s). This strategy primarily works well for investors with the following life circumstances:

The individual must:

  1. Be Nearing, or in retirement
  2. Have enough retirement savings to provide adequate income during retirement
  3. Be in good health
  4. Have a strong desire to pass assets to beneficiaries in a tax-efficient manner

In order to describe the workings of this strategy, I’ve detailed a case study below:

John Smith is age 65, in good health, and retired. He has sufficient assets to maintain a quality standard of living during retirement for his family. John just inherited $250,000.00 from his Father’s estate. Since he doesn’t need to use these additional assets for living expenses, John wants to invest these assets tax-efficiently in hopes of leaving as much as possible to his beneficiaries. (His wife, Judy, is the primary beneficiary, and his two children are the contingent beneficiaries).

John can invest the $250,000.00 into a Variable Annuity with a living benefit rider. This living benefit rider allows John to withdraw 5% annually (or less) from the $250,000.00 investment. As long as he withdraws 5% or less annually, he is guaranteed to receive this income for the remainder of his life. As such, John is guaranteed at least $12,500.00 per year for the rest of his life regardless of market performance ($250,000.00 times 5%). Since he doesn’t need the income and is in good health, John can purchase a Universal Life Insurance policy with the $12,500 annual income. By using the $12,500 income, John purchases a Life Policy Guaranteed through Age 100 with a death benefit equivalent to $658,000.00 (This death benefit amount is currently offered through Genworth Life for a male, age 65, with a preferred health rating).

John simply pays $12,500.00 in annual premium until his death and his beneficiaries receive the $658,000.00 + any remaining balance in the Variable Annuity at that time. The best part of this strategy is that the death benefit proceeds from the life policy are income tax free to the beneficiaries. By keeping within the limits of the annuity contract and not outliving the age 100 limit on the life policy, John’s $250,000.00 investment will be guaranteed to almost triple over his remaining life (or more if the annuity performs well)……best of all, the beneficiaries pay no income tax on the gain in value. Furthermore, if John is concerned about a potential estate tax issue, he could place the life insurance policy in an irrevocable life insurance trust for his children. If John places the life insurance in the trust more than three years before his death, the life proceeds will bypass John and Judy’s estate….therefore avoiding potential estate tax.

If you think this strategy could benefit you, please don’t hesitate to give us a call to discuss further details. Thank you for your continued business with us! We wish you a wonderful 2011!


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