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High-Income & High-Net-Worth Legacy Planning Ideas

Higher Taxes

As “Covid Relief” bills and benefits continue to ring up the national debt, the current administration is looking for ways to pay for it all.  “Taxing the rich” seems to be in vogue and all we await is how or how many ways they will do it.  Recent bills start to give us some indication of how far they may be reaching.

When investing, it is not about “what you make” but “what you keep”.  For High-Net-Worth clients it is most important to follow the current legislation; it is expected any bill they pass will start in 2022.  Since Congress is thinking of limiting future lifetime gifts to $1,000,000, some may want to get to their legacy planning NOW! 

They are not only looking to lower the federal exemption to $3.5 million with a 45% rate.  As your wealth increases the tax does too; a client worth more than $10 million will pay 50%.  Imagine if you are in a state with estate taxation, you could be giving more to the other kids in America vs. your own.

To stay up to date on tax laws and legislation likely to pass, Northern Trust has created a website to keep you informed.

The Tax Policy Resource Center


The Value of Life Insurance

Recent life insurance legislation has increased the ability to heavily fund a life insurance policy without turning it into a Modified Endowment Contract.  You can turn some of your assets into a “never tax me again” category.  Today’s fixed design options compete well with current bond yields. Since life insurance cash value can be accessed without taxation and the death benefit is income tax-free, what you put in life insurance will not be income taxed again when maintained until your death.  If you own it outside of your taxable estate and maintain it until your death it will never be taxed again!

In addition to a lower taxable estate level, Congress is also looking to limit or perhaps eliminate some of the previous strategies used to reduce or minimize tax exposure such as lifetime exclusion gifting, GRAT’s and valuation discounting.  They are considering increasing the capital gains tax and they have already taken away the Stretch IRA strategy.

You can “project numbers” and make “safe assumptions” but life insurance can “GUARANTEE” the outcome when using a guaranteed product.  You can add a long-term care rider for an even more flexible financial asset during retirement. 


Large IRA Legacy planning ideas

The Roth Conversion certainly has value especially if you do not intend to use the money.  The problem with this option for HNW clients is the asset is still in their taxable estate.  The alternative is to take some out; gift it outside your estate and leverage it with life insurance.  Consider this option when you know a client does not need most/all of their qualified assets.  For high income earners on their way to being wealthy, perhaps you redirect some of qualified contributions above the matching limit and fund a life insurance policy for more reliability, flexibility, and liquidity in retirement and beyond?

Roth Conversion Alternative

Life insurance is the new Stretch IRA, says renowned IRA expert Ed Slott! Qualified money is the worst asset to die with for high net-worth clients because they will pay income and estate taxes.  Even though the recent law changes deferred RMD’s to age 72 perhaps it makes more sense to take distributions now and make gifts to an ILIT and leverage them with life insurance.  The Stretch IRA Alternative is most appropriate for high net-worth clients who will not need any/all of the money to live off during retirement.

Why life insurance is the new Stretch IRA

Integrated Insights™ Estate Max – Leverage Your IRA

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The information contained on this website is provided "as is" and does not constitute legal, accounting or tax advice. We are not acting as your attorney, accountant or tax professional. We encourage you to contact the appropriate professional for legal and tax information pertaining to your specific needs and circumstances.
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