How To Disinherit Your Unnamed Beneficiary

This time the unnamed beneficiary gets zero.

Jim Lorenzen, CFP®, AIF®

In my last post, I revealed that virtually everyone with a 402(k), IRA, or even an annuity has an unnamed beneficiary who may get the lion’s share of the money you’ve worked so hard to get.  If you haven’t read it, you can find it here.

That post showed you how you could offset that inheritance and give more money to your kids.   This post will show you how you can disinherit this unnamed beneficiary altogether – at least from the above-mentioned accounts.

I used a hypothetical example of someone who had three kids living in a high tax state like California and a $600,000 IRA.   If the kids are two-income households and successful, they could be paying 40% to the state and federal governments for the money they end-up taking from the inherited IRA.

$600,000 divided by 3 kids = $200,000 per kid.  At 40%, each kid would be paying $80,000 in taxes, realizing $120,000 after tax.   The state and federal governments would therefore receive $80,000 x 3 kids = $240,000  -  this would be DOUBLE what each kid would end-up with!

What if you could disinherit the government altogether?

You guessed it:  There’s only ONE tool I’ve found that can do this, if combined with the right strategy.

In my last post, I talked about using a life insurance policy and the children using the tax-free death benefit to pay the taxes, keeping their IRA inheritance in-tact.  This time we do it differently.

Starting with the same $600,000 IRA, we purchase a $600,000 survivorship life insurance policy (it pays after the last of two spouses dies).  This time, however, instead of using the death benefit to pay the taxes, the death benefit goes to the children tax-free. 

The strategy: 

1. Name a tax-exempt charity as beneficiary of your IRA.
2. Purchase a life insurance policy for full estimated IRA value (we’ll use $600,000).
3. At death, the charity receives the IRA proceeds tax-free.
4. Your kids receive the $600,000 ($200,000 each) tax-free.
5. The state and federal governments get zero.

Your kids received $80,000 more than the $120,000 they would have received, a 70% increase using our hypothetical tax bracket – that’s $240,000 went to them instead of the government, who got nothing.

How much did the life insurance cost?   That depends on the policy and the company, but I think it’s less than $240,000, ya think?

Jim

 

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER^® professional and an ACCREDITED INVESTMENT FIDUCIARY^® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.