How To Maximize Your Estate: Insurance To Pay Estate Taxes

By: Ed Slott

Ed Slott, a CPA in Rockville Centre, N.Y., is one of America's leading IRA experts.*

Life Insurance is the Greatest Single Benefit in the Tax Code
Before, you read this, you should know that I do not and never have sold life insurance but I believe in the concept to build exponential wealth by leveraging other assets including your IRA. I have done this for my own family and you should look at this as well.

If you have just too much wealth and cannot foresee escaping estate taxes then I guess that is a good thing on the one hand, but you should really look at life insurance to provide the money that your heirs will need to pay those estate taxes and other post death expenses, so that your IRA will not have to be tapped to pay those bills. That would create a tax on tax scenario that will wipe out your IRA and kill most of the tax benefits. I wrote a book about that too called “The Retirement Savings Time Bomb and How to Defuse It” (Penguin 2004). The basic premise is that at this level, your IRA is loaded with tax and the best thing to do is to have enough life insurance to cover all post death taxes and expenses. If most of your IRA is a large amount of your estate and you do not have other funds from which to pay for the life insurance, then it still pays to withdraw from your IRA, pay the tax and put those funds into a life insurance policy that can be set up by your insurance professional to be estate and income tax free. By doing this, you will have turned a highly taxed asset like your IRA, into maybe 10 times that amount of totally tax free money simply by leveraging your taxable IRA into tax free life insurance.

In another article on this site where I talk about the “Stretch IRA” concept, I mentioned that the stretch IRA is one of the biggest single benefits in the tax code, but the tax exemption on life insurance proceeds tops them all. The fact that life insurance money is tax free to your heirs is not one of the single biggest tax benefits in the tax code. It is THE biggest tax break ever created by Congress and you should leverage your IRA to take advantage of this. Even if you are not concerned about estate taxes, you can still leverage your IRA into mounds of tax free money for your beneficiaries with life insurance.

By leveraging the assets you currently have, including your IRA, your family can end up with much more wealth than you ever had, and it can all be tax free. Life insurance is simply the most efficient and quickest a way to build tax free wealth. Even for those people who say they can invest better than the insurance company, the life insurance pays off when you die even if that is a day after the policy is in place. No investment can beat that return. The amount of life insurance you need is the amount of wealth you want to create for your family. You pay a relatively small amount of money now for a tax free windfall forever. That to me is what estate planning is all about.

It’s all comes down to capitalizing on the Tax Code by leveraging taxable IRA funds into much more money that comes out all tax free to your heirs; More money and all tax free.

* Ed Slott, a CPA in Rockville Centre, N.Y., is a nationally recognized IRA distribution expert, professional speaker and author of several IRA books including the newly released Your Complete Retirement Planning Road Map (Random House; 2007) and Ed Slott’s IRA Advisor, a monthly IRA newsletter. Ed Slott has also created The IRA Leadership Program™ and Ed Slott’s Elite IRA Advisor Group™ developed specifically to help financial advisors, financial advisor firms and insurance companies become recognized leaders in the IRA marketplace. Visit his website at www.irahelp.com.