IRA Wealth Protection Strategy 2009


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In this presentation I discuss a strategy for protection significant IRA wealth. This strategy and more is available to my clients. Audio will soon be added.

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  • IRA Wealth Protection Strategy 2009

    1. 1. Individual Retirement Accounts Wealth Protection Strategies Maintain the Value of Your Account for Your Heirs
    2. 2. Disclosures <ul><li>All specific legal and tax questions should be referred to your legal and tax advisers. </li></ul><ul><li>Insurance products issued by the Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. </li></ul><ul><li>Guarantees re based upon the claims-paying ability of the issuer. </li></ul><ul><li>Product, product features and rider availability vary by state. </li></ul><ul><li>Issuers not licensed to conduct business and products not distributed in AK, HI or NY. </li></ul><ul><li>Survivor Life LP is issued as policy form 96-QL-1/-1U and any state variations. </li></ul>
    3. 3. Congratulations! <ul><li>You saved wisely with </li></ul><ul><li>individual retirement </li></ul><ul><li>accounts (IRAs) and </li></ul><ul><li>tax-qualified plans. </li></ul><ul><ul><li>Tax-deductible contributions </li></ul></ul><ul><ul><li>Tax-deferred growth </li></ul></ul>
    4. 4. Do You Have Multiple Sources of Retirement Income? IRAs Investments 401(k) Social Security Pension
    5. 5. Do You Have More Income Than You Need?
    6. 6. You Can’t Take It With You <ul><li>(IRAs are taxed at death) </li></ul>Federal and state income taxes = 35% or more. Federal and state estate taxes = 45% or more.
    7. 7. The “Disappearing” IRA *Our example assumes that an IRA is passed to a non-spouse beneficiary and is subjected to state and federal estate taxes totaling 45%. It also assumes that the IRA’s beneficiaries take the remaining IRA in a lump-sum (the option most beneficiaries select) and are subjected to state and federal income taxes totaling 35%. (Post-death taxes on a $500,000 IRA*) Estate Taxes $225,000 Net To Heirs $178,750 Income Taxes $96,250 64% Shrinkage
    8. 8. Your Wealth Protection Strategy <ul><li>Pass the value of your IRA, qualified </li></ul><ul><li>retirement plan, or other savings </li></ul><ul><li>accounts to your heirs. </li></ul>If structured properly, the value of your IRA can be repositioned as tax-free life insurance proceeds.
    9. 9. How This Wealth Protection Strategy Works <ul><li>Five </li></ul><ul><li>Planning </li></ul><ul><li>Steps </li></ul>
    10. 10. How This Wealth Protection Strategy Works <ul><li>Step One : Take distributions from your IRA. </li></ul><ul><li>Distributions are taxable. </li></ul>Age Subject to specific rules, penalty-free distributions prior to age 59½* Distributions must begin after age 70½*** *Early penalty tax of 10% waived for distributions in case of death or disability, or if taken as a series of substantially equal periodic payments. Other restrictions and exceptions may apply. See a tax specialist for details. **In some limited cases, distributions after age 59½ may still trigger an early withdrawal penalty. See a tax specialist for details. ***Subject to certain restrictions, individuals who remain employed after age 70 ½ may delay distributions until April 1 of the year following the year in which they retire. See a tax specialist for details. Penalty-free distributions after age 59½** 59 ½ 70 ½
    11. 11. How This Wealth Protection Strategy Works <ul><li>Step Two : Create an irrevocable life insurance trust and fund it with gifts from your after-tax </li></ul><ul><li>IRA distributions. </li></ul><ul><li>With assistance from an attorney, you establish a trust. </li></ul><ul><li>You name a trustee. </li></ul><ul><li>You select the trust’s beneficiaries. </li></ul>You can choose to use part, or all, of your after-tax distribution to fund the trust.
    12. 12. How This Wealth Protection Strategy Works <ul><li>Step Three : The trustee purchases </li></ul><ul><li>a life insurance policy covering you </li></ul><ul><li>and/or your spouse.* </li></ul><ul><li>The policy is owned by the trust. </li></ul><ul><li>The trustee manages the policy according to your instructions. </li></ul><ul><li>*Assuming you and/or your spouse qualify for life insurance based </li></ul><ul><li>on your age and health. </li></ul>Depending on your age and health, your policy amount may exceed the value of your IRA.
    13. 13. How This Wealth Protection Strategy Works <ul><li>Step Four: At death, the trust receives </li></ul><ul><li>tax-free life insurance benefits. </li></ul><ul><li>Death benefits are income tax-free. </li></ul><ul><li>Death benefits are estate tax-free. </li></ul>
    14. 14. How This Wealth Protection Strategy Works <ul><li>Step Five : The trustee distributes </li></ul><ul><li>the policy proceeds to your heirs </li></ul><ul><li>according to your instructions, estate </li></ul><ul><li>and income tax free. </li></ul>Your specific instructions are contained in the life insurance trust and the trustee must adhere to the trust provisions.
    15. 15. Summary <ul><li>Planning Steps </li></ul><ul><li>IRA owner takes IRA distributions. </li></ul><ul><li>IRA owner creates a life insurance trust and funds the trust with gifts. </li></ul><ul><li>Trust purchases an insurance policy covering the IRA owner’s life. </li></ul><ul><li>At IRA owner’s death, the trust receives insurance death benefits – estate and income tax free. </li></ul><ul><li>The trust distributes tax-free proceeds to IRA owner’s heirs. </li></ul>Life Insurance Trust 4 2 IRA Owner 3 Life Insurance Policy 5 Heirs 1 IRA
    16. 16. Walter & Carmina <ul><li>Couple Profile: </li></ul><ul><li>Both are age 65 </li></ul><ul><li>Combined, they have a pension plan, Social Security benefits and investments for retirement </li></ul><ul><li>They have a $250,000 rollover IRA </li></ul><ul><li>They have a son and a daughter </li></ul>
    17. 17. What They Have... and What They Want <ul><li>Both are healthy and are insurable </li></ul><ul><li>They have sufficient retirement income </li></ul><ul><li>They want to pass the value of their IRA to their children </li></ul><ul><li>They want to minimize overall estate and income taxes </li></ul>
    18. 18. Option One: Keep The IRA $250,000 IRA held until death of second spouse with required mini-mum distributions starting at age 70½ and reinvested in a side fund growing at 6%, after tax. IRA value is then passed to heirs at death. The IRA value consists of the IRA balance at the death of the second spouse, plus the IRA required minimum distributions taxed to the parents at 30% and reinvested at 6%, after tax. Example assumes a 8% annual rate of return on the IRA. Example applies a 45% estate tax on IRA value and side fund. Example also assumes heirs elect to take a lump-sum distribution of the IRA with income taxes of 30%. $210,888 ($73,296) ($0) ($73,296) ($199,898) ($32,616) ($232,514) IRA Balance: $444,217 Side Fund: $72,481 Total: $516,698 Amount To Heirs Income Tax Estate Tax Death of Second Spouse at Age 75 $447,534 ($93,018) ($0) ($93,018) ($253,687) ($188,584) ($442,271) IRA Balance: $563,748 Side Fund: $419,075 Total $982,823 Amount To Heirs Income Tax Estate Tax Death of Second Spouse at Age 85
    19. 19. Option Two: Use an IRA Wealth Protection Strategy The $250,000 IRA is distributed with after-tax amounts used to fund a life insurance contract owned by an irrevocable life insurance trust. *Example depicts Ohio National’s Lifetime G, a guaranteed death benefit universal life insurance policy, on a 65-year-old female, preferred nonsmoker with a single premium of $162,500 (assuming an income tax rate of 35% on the $250,000 IRA distribution). Product availability varies by state. $625,000 ($0) ($0) $625,000 Amount To Heirs Income Tax Estate Tax Insurance Benefit to Age 121
    20. 20. Comparison: Net To Heirs (At Age 85) A difference of $177,466 Keep The IRA Use an IRA Protection Strategy Net to Heirs $625,000
    21. 21. Planning Questions
    22. 22. Is This Strategy Right for You? <ul><li>Examine your retirement income needs and resources </li></ul><ul><li>Analyze your estate tax exposure </li></ul><ul><li>Consider your insurability </li></ul>
    23. 23. When Is the Best Time to Start? <ul><li>The earlier, the better </li></ul><ul><li>Insurance is usually more affordable at younger ages </li></ul><ul><li>“ Health is a temporary condition” </li></ul>Be aware of penalties for withdrawals from qualified plans prior to age 59 ½. With proper planning, withdrawals are penalty free.
    24. 24. Do You Need A Trust? <ul><li>A trust ensures: </li></ul><ul><ul><li>estate tax-free death benefits. </li></ul></ul><ul><ul><li>control of distributions. </li></ul></ul>If you do not want to use a trust, you can name someone outside your estate (for example, your children as owners of the insurance policy to preserve estate tax-free benefits.
    25. 25. Is This Strategy Limited To IRAs? Non-qualified Annuity Roth IRA Savings & Thrift Plan Tax Sheltered Annuity SIMPLE IRA SEP IRA Profit Sharing Plan 403(b) Plan Money Purchase Plan 401(k) Plan 457 Plan Traditional IRA Virtually all qualified and non-qualified savings may be appropriate
    26. 26. About Ohio National <ul><li>When you purchase a policy through Ohio National, you can feel good about your choice. Since 1909, Ohio National has been marketing a variety of insurance and financial products in 47 states (all except Alaska, Hawaii and New York), the District of Columbia and Puerto Rico, with subsidiary operations in Santiago, Chile. We are committed to building long-term relationships with our customers and to providing them with solutions as their needs change over time. </li></ul>
    27. 27. Ohio National's Financial Ratings <ul><li>The financial strength of our company is backed by the reaffirmation of our ratings. These ratings include: </li></ul><ul><ul><li>&quot;A+ (Superior)&quot; from A.M. Best Company (based on balance sheet strength, operating performance and business profile), its second-highest ranking out of 16 categories. </li></ul></ul><ul><ul><li>&quot;AA&quot; (Very Strong) from Standard & Poor’s (for financial security characteristics), its third-highest ranking on a 21-part scale. </li></ul></ul><ul><ul><li>&quot;A1&quot; from Moody's (for insurance financial strength), its fifth-highest ranking on a 21-part scale. </li></ul></ul>