In part 1 of this series of posts, we talked about how to complete a Qualified Charitable Distribution (or QCD as we ‘in the biz’ like to call it) from your Traditional or Rollover IRA and what it (the QCD) is along with its potential benefits. After distributing the article, I got some feedback from a few of the readers. One of them said: “that’s a great idea and all, but what if the IRA owner wants to give some money to a charity, AND he/she also wants to leave as much to their kids as possible?” After pondering that for a minute or two I realized he had a good point. I didn’t really think of that concern as I was writing it.
So, let’s talk about that.
If you want to utilize a QCD, but also want to make sure your kids inherit as much of your IRA as possible, I’ve got an idea for you. Life insurance! Exciting, isn’t it? Seriously, is there anything on the planet more boring than insurance? Yeah, actually there is. Insurance continuing education. Trust me on this.
If you think about it, essentially this strategy lets you tell Uncle Sam to pound sand not once, but twice! You generally get an income tax break on your required minimum distribution. Then, you normally get your life insurance death benefit proceeds federal income tax free as well. Damn I’m good.
Although life insurance’s primary reason for existence is income replacement in case an income earning individual passes away and leaves behind one or more dependents, you can use it to accomplish other goals. Let’s say you’re the breadwinner of the family and You’re making $125,000/yr in gross income. You’ve got a $200,000 mortgage and 3 kids you want to put through college. How are you going to accomplish all those things if you’re pushing up daisies? Therefore, not working? (Those two things usually go hand in hand). If you had a $700,000 life insurance policy that would help, wouldn’t it? (Hint: the answer is yes.)
While that’s a primary use for life insurance one can also do other things with it. It can be used as an effective estate planning tool, for example. You could use the prospectus as a door stop on a windy day. Or you could use it to make sure your kids inherit a certain sum of money while using a QCD each year to draw down your IRA. (That’s called ‘connecting the dots by the way.’ It takes a seasoned financial author with years of experience to pull that off so beautifully.)
I don’t want to bog you down with a bunch of details here, but there are a few benefits to this approach:
- When a child inherits a Traditional IRA, said child will be required to take annual required minimum distributions themselves, which are generally taxable. An inherited IRA withdrawal might even bump the beneficiary of said IRA into a higher tax bracket. Life insurance death benefit proceeds are typically income tax free! A large, unexpected tax bill can be like a wet blanket on an inheritance.
- Upon inheriting an IRA, a beneficial child will most likely want to rebalance/reinvest/liquidate the investments inside the IRA to fit said child’s investment goals, time horizon, and desired risk. This may generate commissions or fee(s). Life insurance death benefit proceeds come in the form of cash. No selling or rebalancing needed. No commission(s) or trading costs. The beneficiary can do whatever they wish with the cash. Hopefully something smart.
So, there you have it folks. Part 2. Brought to you because of reader feedback which I greatly appreciate. Sometimes I wonder if anyone actually reads this stuff.
Ok, that’s it. I’m done.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Other specific rules may apply as laws may change. Consult a professional before making any decisions regarding gifting required minimum distributions.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.