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Leaving a Financial Legacy

May 12, 2011
Maui Weekly

Fortunately, individuals who do not need to rely upon their IRA for retirement and who have strong charitable and philanthropic inclinations, have an option to avoid this tax burden while creating a potentially huge financial legacy for future generations. For those individuals who may not need to tap into the IRAs at all, other than to meet “required minimum distribution” rules when they turn 701/2 years of age, the strategy is as simple as filling out the beneficiary designation form and designating the charity as the beneficiary upon the death of the account holder. At death, the estate will be entitled to a charitable income and estate tax deduction for the amounts left to charity from the IRAs.

So, where’s the financial legacy? During his or her lifetime, the account owner can take regular distributions from the IRA (if over 591/2 to avoid penalties) or required minimum distributions if over 701/2. These distributions can then be:

• gifted to individual beneficiaries (e.g., grandchildren) for the payment of life premiums on the life of the IRA owner to replace the IRA assets, or

• gifted to an irrevocable life insurance trust (“ILIT”) for the purpose of paying premiums on life insurance on the owner’s life to create significant wealth for the named beneficiaries of that trust. Beneficiaries could be children, grandchildren, great-grandchildren and even beyond, if done correctly.

Also, every U.S. citizen has a lifetime exemption that can be allocated to exempt transfers of property from the generation-skipping transfer (GST) tax. The exemption is automatically applied when considered a “direct skip gift” (it goes directly to the grandchild “skipping” the child). In all other cases, GST exemption must be specifically allocated by the grandparent on gift tax returns.

When a grandparent creates an ILIT to benefit grandchildren and future generations, the GST exemption is allocated to gifts that goes into the trust. If the gifts to the trust are used to pay life insurance premiums, then the death benefits that are delivered to the trust should be both GST tax-free and estate tax-free. For married couples, each spouse can participate in this strategy, doubling the amount of money that may be available to purchase life insurance to create the financial legacy.



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