Estate Planning

Transferring Wealth with a Stretch IRA

Want a way to flex some retirement planning muscle? Then consider a “stretch” (inherited) IRA. Not only can this strategy preserve wealth for future generations, it also has the potential to keep assets growing in a tax-deferred account for years to come. Here’s the inside scoop, based on one hypothetical family situation.

One Scenario
Imagine that George has accumulated $50,000 in a traditional IRA. His wife, Amy, should be well cared for through a $500,000 life insurance policy, his work pension plan, as well as several pieces of real estate and investment accounts they have transferred to a trust. Although Amy is also the beneficiary of his IRA, he wonders if it might be better to leave the IRA to their 25-year-old son Robert.

George meets with his financial consultant and finds out that in 2002, the IRS finalized rules simplifying the process of taking required minimum distributions — that’s the minimum amount that you must withdraw each year from tax-deferred retirement accounts after you reach age 70 1/2. The new rules extend the IRS’s life expectancy table, reducing the amount that must be withdrawn each year and making it much easier to “stretch” IRA assets to future generations.

Weighing the Benefits
George discovers that a non-spousal beneficiary of an IRA can receive distributions based on his or her own life expectancy. That means if Robert is the beneficiary of the IRA, the distributions could be stretched out over his entire lifetime.

Alternatively, Bob could name both his wife and son as primary beneficiaries. If Amy decided she didn’t need the income from the IRA, she could then allow Robert to become sole beneficiary of the account. Yet another possibility: George could bequeath the IRA to his one-year-old granddaughter Heather, allowing her to take advantage of tax deferral by taking distributions over a potentially even longer period of time.

“This is complicated,” says George to his financial consultant. “We want to be sure we haven’t overlooked anything and that we’re making the best move for us and our family. At the same time, this appears to be a tremendous opportunity to pass on wealth to future generations.”

Have you determined how your retirement accounts fit into your overall estate plan? Consider discussing this topic with your financial advisor.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

© Carmen Coleman, President, and CEOLifetime Financial Group, LLC
30 W. Broad Street, Suite 300Rochester, NY 14614(585)325-2525 

Tracking #623066

Life Insurance: Protecting Today’s Assets and Tomorrow’s Heirs

Many people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs continually throughout your life to ensure the assets you’ve accumulated are protected and to provide additional opportunities to create wealth.

Estimate Your Needs
Before assessing your insurance needs, look at your annual income. Then tack on one-time expenses, such as a mortgage, debt, and college tuition bills for your children. Remember to consider the amount you still need to invest to fund your retirement. Also factor in your final costs — estate taxes, potential uninsured medical costs, and funeral expenses.

Another factor to consider when purchasing life insurance is whether to also use it to help complement your savings efforts. Because some types of life insurance have a tax-deferred savings component, it may offer you an additional way to save for the future.

Choices, Choices
Next, figure out which type of life insurance is best for you. Many younger people opt for term insurance because of its relatively inexpensive cost. The policy is written for a set period of time and may be renewed (although the premiums usually increase each time you renew).

Mature investors may wish to consider a permanent policy, which combines life insurance coverage with a tax-deferred savings vehicle and is generally more expensive than term. You pay the premiums and receive a fixed death benefit that might potentially rise depending on the policy’s cash value. Part of each premium accrues as cash value, and you may be able to borrow against the accumulated cash tax free.

In addition to the broad categories of term and permanent, there are a variety of other life insurance choices available — any of which might be appropriate for your situation.

Estate Planning
Some people use life insurance to fund an irrevocable life insurance trust to either create or transfer wealth for future generations, fund estate tax liabilities, or to help manage small business succession issues. This type of trust helps to preserve assets because, if drafted and executed properly, the death benefit is not subject to estate taxes. It also offers the benefit of flexibility. For example, it may be set up to allow a surviving spouse to receive regular payments from the insurance policy or to set aside assets for a minor. Drawbacks are that you lose control over the policy, insurance premiums could be expensive, and you’ll most likely pay legal fees to create and maintain the trust.

Seek Qualified Help
Different life insurance policies and their costs, terms, and restrictions can be confusing. Consider working with a financial or insurance professional to determine which type of life insurance best fits your needs. At a minimum, be sure to include your life insurance needs whenever you review your overall financial planning needs regardless of your age.

The policy is subject to substantial fees and charges. Death benefit guarantees are subject to the claims-paying ability of the issuing life insurance company. Loans will reduce the policy’s death benefit, cash surrender value and will have tax consequences of the policy lapses.

Annuities May Help Make Your Income Last a Lifetime

With demographic trends pushing the length of retirement to 25 or 30 years and beyond, it’s important to create a retirement investment strategy that generates an income stream that you won’t outlive. If you’re looking for an investment vehicle that promises a guaranteed, lifetime income stream, then you may want to consider annuities. Simply put, annuities can help ensure that you won’t outlive your savings.

Annuities Defined
Annuities are insurance contracts that promise future payments. They’re long-term, tax-deferred investment vehicles designed for retirement purposes.  There are two distinct phases to annuity investing: the “accumulation phase” occurs when you are contributing, while the “annuitization or distribution phase” occurs when you withdraw money.

While annuities may be attractive because they usually impose no contribution limits and offer tax deferral, they also have other appealing features as well, such as their numerous “payout” options in the distribution stage. For instance, during retirement you can receive your money from an annuity in a single lump sum or as a series of regular payments over your life or some other predetermined number of years. Some retired clients find it easier and less stressful to manage their household expenses through a regular income stream, just as they did while working.

But getting a regular income stream doesn’t necessarily limit your options. Today’s annuities offer the flexibility, access and control over your money that often wasn’t available in the past. Product innovations have resulted in optional benefits that provide downside guarantees¹, the ability to capture the market’s upside, inflation protection and cost-of-living increase features, all of which may help investors plan for a long retirement.

In short, annuity payouts through a regular income stream may be an important part of your retirement portfolio. If you own an annuity now, you might want to consider using it to potentially generate income. For more detailed information about the role that annuities might play in your financial future, contact a qualified financial professional.

¹Riders are additional guarantee options that are available to an annuity or life insurance contract holder.  While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policyholder should review their contract carefully before purchasing 

Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes; but the variable annuity contains both an investment and insurance component.  Variable annuities are sold only by prospectus. Guarantees are based on claims paying ability of the issuer.  Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.  The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. 

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing.  The prospectus contains this and other information about the variable annuity contract and sub-accounts.  You can obtain contract and underlying sub-account prospectuses from your financial representative.  Read the prospectuses carefully before investing.

Is a Million Dollars Enough?

If your clients left $1 million to their family in the form of a life insurance policy’s death benefit, would it be enough? You may be surprised at the answer.

A Quick Case Study
Tom and Susan are a married couple with:

  • A $200,000 mortgage
  • Annual incomes of $60,000 each
  • Two children, ages 2 and 4

In the event Tom or Susan should pass away, they want:

  • To provide for their children’s education
  •  Their family to be able to pay off all expenses and debt
  • Their family’s standard of living to remain the same
  • The surviving spouse to retire comfortably

Upon the passing of one spouse, the other spouse receives the $1 million benefit. Subtract from that the mortgage, college costs of $95,0001 and funeral and other final expenses of $5,000, leaving a lump sum of $700,000. A hypothetical return rate of 6% would create an annual income stream of $42,000. That amount replaces only 70% of the spouse’s missing income ($60,000) with no adjustment for inflation.

If Tom and Susan would like to maintain the annual pre-tax income of $60,000 (and assuming a 3% inflation rate and an annual pre-tax investment rate of 6%), the lump sum will last only 14 years.

1  Based upon both children attending school with current tuition of $20,000 a year, taking into account 4% inflation and 8% return on a lump sum of money for 16 and 14 years, respectively.

In the case of Tom and Susan, a surviving spouse would only be able to maintain the family’s current standard of living for 14 years. What are your clients’ needs, and do they have the appropriate coverage in place?

This case study can serve as a valuable illustration and encourage a dialogue between you and your clients regarding the importance of proper life insurance coverage.

Annuities and Insurance: Filling the Cracks in Your Financial Plan

If you’re contributing to an employer-sponsored retirement plan on a regular basis, be sure to congratulate yourself!  You are already taking an important step toward addressing what may be the biggest financial challenge you will ever face. And if you are setting aside money for the college education of a child or grandchild, you deserve credit for that, too.

But take heed: There may be more you can or should be doing. In fact, a well-rounded financial plan might also need to include insurance strategies and the use of annuities to safeguard your vision of the future. However, you should consult a financial professional before deciding whether a particular insurance strategy is an appropriate choice in light of your particular needs and financial position.

Retirement Readiness: More Than a Plan?
While most financial experts encourage workers to contribute the maximum amount allowed to their retirement plans, they also warn that such contributions may not be enough to guarantee a secure future.

For example, the Social Security Administration estimates that, on average, retirees receive less than one quarter of retirement income from private pensions (including retirement savings plans); Social Security payments account for only an additional 39% of income. Ultimately, you may be responsible for addressing any shortfalls.1

Annuities may offer one way to bridge that gap.  An annuity is an investment contract offered through an insurance company and purchased with one or more payments.  Annuities offer a lifetime stream of income and depending on the terms of the contract purchased, generally offer a guaranteed return of principal if you die before withdrawals begin. And because an annuity is a tax-deferred investment account, earnings are not taxable until money is withdrawn, which means the value of your assets have the potential to grow more rapidly than in a taxable account.2

There are many kind of annuities, but these two types of annuities have become more popular: fixed deferred annuities and variable deferred annuity.  Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes; but the variable annuity contains both an investment and insurance component.

A fixed annuity pays a fixed rate of return for a stated period of time.  A variable annuity offers a variable rate of potential returns, based upon the wide range of investment options through their underlying subaccounts.  However variable annuities don’t guarantee a fixed return.  However, guarantees are based on claims paying ability of the issuer. 

Since annuities generally do not have contribution limits, they may make sense for workers who have already maximized contributions to their other tax-advantaged accounts, such as retirement plans and IRAs.  It is important to note that purchasing an annuity inside a qualified plan does not provide additional tax deferral beyond what is received when investing in a qualified plan outside an annuity. 

The Insurance Safety Net
You may also want to consider purchasing insurance policies in order to protect against unexpected financial hardships that might otherwise require you to spend money earmarked for other goals.

For example, disability income insurance could enable your family to maintain its current standard of living in the event that you are unable to work for a period of time. And life insurance could provide your dependents with longer-term security after your death. 

Keep in mind that term life insurance only provides coverage for a predetermined amount of time, while whole life insurance can remain in effect indefinitely, provided premiums are paid. Also, whole life insurance typically includes a cash value feature that can allow you to accumulate additional wealth over time.  The cost and availability of life insurance depend on such factors as age, current health, and the type and amount of insurance purchased. 

To learn more about the strategies that could plug holes in your financial plan, consider speaking with a financial professional before you decide whether a particular investment is an appropriate choice in light of your unique financial needs and risk tolerance.

1Source: Social Security Administration, 2006.

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing.  The prospectus contains this and other information about the variable annuity contract and sub-accounts.  You can obtain contract and underlying sub-account prospectuses from your financial representative.  Read the prospectuses carefully before investing.

Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.  The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. © 2010 Standard & Poor’s Financial Communications. All rights reserved.

© Carmen Coleman, President and CEOLifetime Financial Group, LLC
30 W. Broad Street, Suite 300Rochester, NY 14614(585)325-2525 

Tracking #623105

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