The Role of Life Insurance

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1 The Stretch-Out IRA Strategy The Role of Life Insurance

2 Combining life insurance with an IRA Stretch-Out is an estate planning strategy that can help build and transfer wealth IRAs are the largest and most common form of retirement savings in America, with one out of every four retirement dollars going into IRAs. In 2010, 41% of American households owned an IRA, representing more than $4.7 trillion. 1 While many people will need their IRA assets in retirement, others will have sufficient resources to supplement their retirement income outside of their IRAs. Those who do not need their IRAs in retirement may desire to pass the IRA on to the next generation. If this is so, there are some important considerations to keep in mind: n Heirs typically receive only 30% to 40% of their inherited IRA account s value due to the eroding power of estate and income taxes. pay estate tax. Withdrawals are taken from the IRA 2 and used to purchase a life insurance policy on the life of the IRA owner. Combining life insurance with an IRA Stretch-Out is an estate planning strategy that can help build and transfer wealth. This brochure will help identify who can benefit from this strategy, then show how to use life insurance with an IRA Stretch-Out plan. n With the right kind of planning strategy, IRA assets can provide a substantial legacy to future generations. What Is an IRA Stretch-Out? An IRA Stretch-Out is a planning strategy that allows individuals to pass on their IRAs to their loved ones after death and continue the IRA s taxdeferred growth without tapping into the IRA to Life insurance is the key to this planning strategy. A life insurance policy allows beneficiaries to avoid accessing the IRA assets to pay estate taxes and other transfer costs associated with the death of the IRA owner. 1 Investment Company Institute Research Fundamentals, January Under current federal tax law, amounts withdrawn or distributed may be subject, in whole or in part, to federal income tax. In addition, a 10% federal income tax penalty may apply if distributions are made prior to the owner reaching age State income taxes may also apply.

3 A typical candidate for an IRA Stretch-Out is over 60 years old, has a substantial qualified retirement plan that allows distributions capable of being rolled over into an IRA, and doesn t need to use the IRA assets during his/her (or his/her spouse s) retirement. Step 1 A candidate for an IRA Stretch-Out must: n Have a sizeable IRA of at least $1 million. n Not anticipate needing the funds for retirement. n Want to pass on the IRA to loved ones with minimum depletion from taxes. Step 2 Individuals should evaluate the estate plan by: n Working with their professional advisors to evaluate the overall estate plan. n Reviewing estate liquidity projections with their professional advisors. n Analyzing insurance options to provide adequate liquidity for the estate. Step 3 To set up the IRA Stretch-Out, clients must: n Work with their professional advisors to properly set up the IRA for a stretch-out. n Coordinate beneficiary(ies), their addresses, phone numbers, and other pertinent information. n Ensure the IRA beneficiary designation is properly titled. Step 4 The purchase of life insurance: n Life insurance is typically purchased on the life of the IRA owner or the IRA owner and spouse, if either spouse intends to roll the inherited IRA over at the death of the IRA owner. n In most situations, the policy will be owned by parties other than the insured, such as an adult child or an irrevocable trust established for the benefit of the IRA beneficiary(ies). n The insured(s) may gift money to the third-party owner for premium payments. n Individuals must consult a tax advisor to determine whether these cash gifts qualify for the $13,000 (in 2011) annual gift tax exclusion per donor/donee.

4 IRA Stretch-Out Fact Finder Client Information Husband s Name Date of Birth Smoker: Yes No Wife s Name Date of Birth Smoker: Yes No Home Address Business Address Any Other Residence Citizenship (if other is applicable, please specify) Husband: U.S. Other Wife: U.S. Other Value of IRA Plan Name: Current Balance: $ as of (mm/dd/yy) Interest Rate: % change to % at owner s age Any additional contributions to the IRA? Yes No Indicate amount annually $. Apply a growth factor to the contribution of %. Contributions stop in (year). Please select one of these objectives: IRA Stretch-Out Distributions Spread the income of an IRA to multiple generations while continuing to defer income taxes. Repositioning Distributions Compares using IRA funds to purchase life insurance to create liquidity for estate taxes without repositioning these funds. Comparisons made during retirement and at death. Retirement Distribution Planning Illustrates the effects of IRA distributions during retirement and the double taxation effect on balances remaining at death. Repositioning Retirement Distributions Combination of Repositioning Distributions and Retirement Distribution Planning to provide a complete distribution analysis. Basic Minimum Distributions Two basic ledgers: (1) calculations of IRA minimum distributions as received by the IRA holder, and (2) the effect on the IRA account balance as minimum distributions are made. Early Retirement Compares the three safe harbor methods for taking IRA distributions prior to age 59 1 /2 without the 10% federal income tax penalty. Lump Sum vs. IRA Stretch-Out Illustrates available methods for taking lump-sum distributions and then compares a lump-sum distribution alternative with receiving comparable distributions from the IRA as partial withdrawals. Comparisons made while living and at death.

5 IRA Stretch-Out Fact Finder (continued) Other Nonqualified Assets Amount $ Growth Rate % Existing Life Insurance Included in the Estate Outside of the Estate (for example, in an irrevocable trust) Husband $ $ Wife $ $ Survivor $ $ Income Tax Rates Use % until age, then use % Years to illustrate until owner s assumed death Income tax rate assumed for nonspouse beneficiary(ies) % Nonspouse Beneficiary Data Beneficiary s Name Date of Birth % of IRA Years to illustrate between owner s assumed death and spouse s assumed death The Life Insurance Illustration The report will estimate the amount of liquidity needed for the IRA Stretch-Out plan to succeed. Should this amount be used for the policy death benefit? Yes No If no, indicate initial face amount $ Level Increasing (initial face amount plus account value) Plus-Premium (initial face amount plus premiums paid) Life insurance product to illustrate: Annual premiums to age 100 or indicate number of years to illustrate premiums Cash surrender value at age 100 equal to Note: This fact finder has been designed for the IRA Stretch-Out Distributions illustration. Other illustration modules will require additional information. OLA

6 This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively Transamercia ), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica s interpretations. Additionally, the information presented here does not consider the impact of the applicable state laws of clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of December Life insurance policies are issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499, or Transamerica Financial Life Insurance Company, Harrison, NY All policies may not be available in all jurisdictions. Transamerica Financial Life Insurance Company is authorized to conduct business in New York. Transamerica Life Insurance Company is authorized to conduct business in all other states. OLA

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