3. Unlike a Roth IRA, the cash value of the second-to-die policy will be small or non-existent if the goal is to maximize the income tax-free death benefit to the children, so clients who feel they may need to access a significant portion of the policy’s cash surrender value during their lifetime will generally want to utilize a second-to-die life insurance policy with a smaller death benefit amount and a larger lifetime cash surrender value.
4. If the couple outlives the longer 35-year joint life expectancy referred to above, the Roth IRA approach would have then been preferable, in hindsight, assuming the 5% lifetime rate of return is achieved.
The couple could obviously choose to hedge their bets and invest some of the $75,000 annual amount in a Roth IRA and some of it in second-to-die life insurance. The key point is that, either way, what the retired couple has accomplished by this plan is to minimize the effects of the potentially very high income tax brackets of their children (because likely the IRA balance will need to be paid out during the children’s peak earnings years) by “milking out” their IRA balances over their joint lifetime, at low tax rates, and transferring the withdrawn funds into a tax-free vehicle producing a reasonable rate of return.
James G. Blase, CPA, JD, LLM, is founder of Blase & Associates LLC, a St. Louis-area law firm practicing primarily in estate planning, tax, elder care, asset protection, and probate and trust administration. Mr. Blase is also an adjunct professor at the St. Louis University School of Law and in the Villanova University Charles Widger School of Law Graduate Tax Program.