putting your ira to work - bba life...

Putting Your IRA to Work

WCLLC.1016 (12.08)

Multi-Generational IRA PlanningYou’ve worked hard for years to accumulate a significant amount of money in your individual retirement account (IRA) or rollover IRA. Now you can make your IRA work hard for you AND your loved ones.

With careful planning, you may be able to enhance the value of the legacy you create with your IRA account and make that legacy last for generations.

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Enhance Your LegacyAccording to a January 2007 report by the Employee Benefits Research Institute, more than $3.6 trillion are invested in Individual Retirement Accounts (IRAs). Chances are you have a share of that significant total.

However, you may be similar to other IRA owners who have come to realize they don’t need their IRA assets for retirement income. They’ve also developed a portfolio of non-IRA assets that are sufficient to provide a comfortable lifestyle in retirement. In fact, if it weren’t for the government’s Required Minimum Distribution (RMD) rules, your preference might be to continue deferring taxes on the IRA for as long as possible.

The key to “deferral” is the understanding that income taxes will be due on your IRA some day. If you do not pay the income taxes on the IRA, your beneficiaries will—and they may be in a higher tax bracket than you.

That’s’ why IRA owners like you are looking for new, more effective ways to transfer their IRA balances to their children and grandchildren. This guide will show you a strategy that may help enhance the overall value of the legacy you create with your IRA, and make that legacy last for generations.

Stretch for SuccessIf you do not actively plan for distribution of your IRA upon death, your beneficiaries could be faced with a significant income tax burden. When your IRA value passes directly to your beneficiaries in a lump sum, they might be immediately responsible for income taxes on the entire amount of the IRA. This tax alone could erode more than one-fourth to one-third of the IRA you’ve given to them.

In this brochure we will show you one alternative that may help enhance the value of the legacy you create with your IRA. First, we will show an example of the total value of your

IRA to you and your beneficiaries if you do no specific planning other than naming your beneficiaries. Then

we will compare that approach to a strategy that may help enhance the overall distribution amount and the legacy you leave to your heirs.

This material contains statements regarding the tax treatment of certain financial assets and transactions. These statements represent only our current understanding of the law in general and are not to be relied upon by purchasers. The tax treatment of life insurance and Individual Retirement Accounts (IRAs) are subject to change. Income, estate, gift, and generation skipping tax rules are subject to change at any time. Neither West Coast Life nor its representatives offer legal or tax advice. Purchasers should consult with their legal or tax advisor regarding their individual situations before making any tax-related decisions.

IMPORTANT INFORMATION

ABOUT 2009 RMDs

The hypothetical examples

shown here reflect Required

Minimum Distribution amounts

being taken in 2009. Due to

recent legislation, IRA owners

are not required to take an

RMD in the year 2009. For

information specific to your

situation, please refer to an

illustration prepared by your

financial representative.

2

Current IRA Distribution PlanLet’s take a look at what may be your current IRA distribution plan. For many people, it may involve designating a surviving spouse as primary beneficiary, then children as beneficiaries for the spouse.

If the original IRA owner is married, the spouse is usually named as the primary beneficiary.

The surviving spouse typically does an IRA Rollover into his/her own account, continuing deferral and Required Minimum Distributions as mandated*. Deferral can continue as long as the surviving spouse lives, and the children are often named as the beneficiaries.

When the children inherit the IRA, their maximum years of deferral are based on their ages at the time they inherit the IRA. This fixed, maximum period cannot be extended regardless of whether the children pass away before this period has expired. The children typically name the grandchildren as their beneficiaries. If the children pass away prior to the end of their maximum deferral period, the grandchildren inherit the balance of the funds, and the remaining balance of the deceased child’s maximum deferral period.

If the grandchildren inherit any portion of the IRA account, they can only continue deferral until the end of the maximum deferral period that was set when their parents inherited the IRA. If the grandchildren do inherit part of the IRA, this could leave an extremely short deferral period for the grandchildren.

For example, assume a child inherited the IRA from the surviving parent and, at the time of inheritance, established a maximum deferral period of 25 years (based on IRS life expectancy tables). If that child survived for 20 years before passing the IRA to the grandchildren, the grandchildren would only be able to defer taxes for the remaining 5 years.

Is there a way to base the maximum deferral period on the life expectancy of the grandchildren? Yes, and it could dramatically increase the maximum deferral period, as well as the total distribution benefit.

* Keep in mind that IRA owners are not required to take an RMD in the year 2009. For information specific to your situation, please refer to an illustration prepared by your financial representative.

Original IRA Owner

Surviving Spouse

Children

Grandchildren

Neither West Coast Life nor its representatives offer legal or tax advice. Please consult your legal or tax advisor regarding your individual situation before making any tax-related decisions.

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Proposed IRA Distribution Plan (Multi-Generational Beneficiaries)The proposed plan for multi-generational beneficiaries illustrates how you could make some minor changes to your current IRA beneficiary designations to enhance your legacy. The key is understanding that IRA rules allow Designated Beneficiaries to continue deferral over a maximum deferred period that is based on their own life expectancy. Therefore, when your grandchildren inherit your IRA directly from you, their younger ages may enable them to continue the tax-deferral advantages for a longer period of time than your children could. This compounding of tax-deferred growth can create significant increases in your legacy.

So, the first step in this proposed plan would be to change the Designated Beneficiary on your IRA from your children to your grandchildren. For married individuals where both spouses are still alive, you’ll most likely leave your spouse as your Designated Beneficiary. The surviving spouse will name the grandchildren as the Designated Beneficiary only after one spouse has passed away.

For purposes of the IRA, when the Designated Beneficiary is changed from the children to the grandchildren, it essentially “disinherits” the children from this portion of your legacy. However, with a Multi-Generational IRA Transfer plan, changing this concern into an opportunity is relatively easy.

Simply consider replacing your children’s IRA inheritance by purchasing a life insurance policy, and making your children the beneficiaries of the policy. One significant advantage of using life insurance is that the death benefit is received by your children free from income tax. Therefore, unlike an IRA inheritance that may be fully taxable to your children, the legacy left with life insurance will be income-tax-free to your children.

The results of this strategy are:• Your children would receive the life insurance death benefit as their inheritance, income-tax-free. They

wouldn’t need to worry about any IRA rules or restrictions about what they can do with their inheritance.

• Your grandchildren would receive the IRA as their inheritance, but instead of paying income taxes on the entire amount at one time, they are able to continue the tax deferral over the rest of their life expectancies, only taking out minimum distributions each year as designated by the Government, and deferring taxes on the balance of the account. Because of their younger ages, their tax-deferral advantages could continue much longer than if your children had inherited the IRA.

How do you pay the life insurance premiums? For people over age 70, the distributions they are required to take from their IRAs every year are typically sufficient to pay the life insurance premiums*. For those under age 70, premiums are often paid by withdrawing the necessary amounts from their IRAs.


* Keep in mind that IRA owners are not required to take an RMD in the year 2009. For information specific to your situation, please refer to an illustration prepared by your financial representative. Taking additional withdrawals from your IRA to pay life insurance premiums may not be your best alternative. Whenever life insurance premiums exceed your RMDs, consider paying those premiums from sources other than your IRA.

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Proposed IRA Distribution Plan(Multi-Generational Beneficiaries)

Assume the original IRA owner is the first spouse to pass away. As before, they name their surviving spouse as the beneficiary.

The surviving spouse does an IRA Rollover into his/her own account, continuing deferral and withdrawals of the Required Minimum Distributions as mandated. Deferral can continue as long as the surviving spouse lives. Instead of naming the children as the IRA beneficiaries, the grandchildren are named as the beneficiaries, and receive the proceeds upon the surviving spouse’s death.

The children inherit income-tax-free life insurance death benefits equal to the projected value of the IRA at the surviving spouse’s death. Your financial representative can help you estimate the projected value. In this scenario, no income taxes are due on their inheritance.

When the grandchildren inherit the IRA account from the grandparents, they establish a maximum deferral period based on the grandchildren’s life expectancy, creating the potential for a much longer deferral period.

For example, assume the parent’s IRA is projected to be worth $500,000 at the surviving spouse’s death. The children would receive a $500,000 income-tax-free life insurance death benefit. The grandchildren would receive the $500,000 IRA and be able to defer the taxes over their (the grandchildren’s) life expectancy. The grandchildren’s life expectancy is typically 20 to 40 years longer than the children’s life expectancy. This extension of the deferral period could be very advantageous to the grandchildren, and

the overall performance of the IRA Legacy.

In this scenario, you can see that life insurance can play an important role in the overall strategy. How would you pay the premiums for the life insurance policy? Typically they are paid by using a portion of the RMD that you are required to withdraw from your IRA.

Original IRA Owner

Surviving Spouse

Children

Grandchildren

Life Insurance Proceeds

IRA Balance

Neither West Coast Life nor its representatives offer legal or tax advice. Please consult your legal or tax advisor regarding your individual situation before making any tax-related

decisions.

5

Sample Case Study

Current Plan Assumptions:At John’s death, Jane will do a “rollover” into her own IRA, naming John, Jr. as the Designated Beneficiary. John, Jr. will “stretch” the IRA proceeds over his life expectancy, according to IRS rules.

Proposed Plan Assumptions:Using a portion of their IRA Required Minimum Distributions, John and Jane could purchase a survivorship life insurance policy now, with John, Jr. as beneficiary, in an amount equal to the projected value of the IRA John, Jr. would have inherited under the “Current Plan Assumptions.” That amount is projected to be $711,519. The policy is the West Coast Life Golden Legacy Protector XSM for a male age 70 and a female age 65, both are Non-Tobacco class.

At John’s death, Jane would do a “rollover” into her own IRA and will continue paying the Golden Legacy Protector X life insurance premiums using a portion of her IRA’s Required Minimum Distribution withdrawal amount. The Designated Beneficiaries for her IRA could be each of the grandchildren, individually, setting up separate accounts for each grandchild. John, Jr. continues as the beneficiary for the Golden Legacy Protector X life insurance policy.

At Jane’s death, John, Jr. will receive the death benefit from the Golden Legacy Protector X life insurance policy, and each grandchild will “stretch” the IRA benefits over their individual life expectancies, according to IRS rules.

Parents

John Smith Jane Smith Age 70 Age 65

Child

John Smith, Jr. Age 40

Grandchildren

Stacy Smith Martin Smith Jackson Smith Age 10 Age 6 Age 2

IRA value as of Prior December 31: $500,000

Assumed IRA growth rate: 7.00%

John lives until: Age 80

Jane lives until: Age 85

John, Jr. lives until: Age 90

Grandchildren live until: Age 90


Stretch distributions from the IRA will be taxable to the recipient. Distribution amounts shown in this brochure do not reflect the deduction of taxes.

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Current IRA Distribution Plan for John and Jane Smith

John’s IRA

Current Value: $500,000

Distributions During John’s Lifetime (10 years): $280,038

Projected Value at John’s Death (Age 80): $640,014

Jane’s IRA

Projected Inheritance Value (At Age 75): $640,014

Distributions During Jane’s Lifetime (10 years): $382,124

Projected Value at Jane’s Death (Age 85): $711,519

John, Jr.’s IRA


Projected Distributions During John, Jr.’s Lifetime (25 years): $1,755,634

Total Projected Distributions for Current Plan:

During John’s Lifetime: $280,038

During Jane’s Lifetime: $382,124

During John, Jr.’s Lifetime: $1,755,634

Total Projected IRA Distributions: $2,417,796

At John’s death, IRA passes to Jane

At Jane’s death, IRA passes to John, Jr.


Proposed IRA Distribution Plan for John and Jane Smith

John’s IRA

Current Value: $500,000

Distributions During John’s Lifetime (10 years): $280,038

Projected Value at John’s Death (Age 80): $640,014

Jane’s IRA


Distributions During Jane’s Lifetime (10 years): $382,124

Projected Value at Jane’s Death (Age 85): $711,519

John, Jr.’s Life Insurance Death Benefits: $711,519

(Received income-tax-free)

At John’s death, IRA passes to Jane

At Jane’s death, John Jr. receives life insurance proceeds. IRA passes to the grandchildren.

Grandchildren’s IRAs

Projected Inheritance Value: $711,519

Projected Distributions: $8,052,533

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Total Projected Life Insurance Premiums Paid*:

During John’s Lifetime: $122,368During Jane’s Lifetime: $111,244Total Projected Premiums: $233,612Premiums are assumed to be paid by using a portion of the

Required Minimum Distribution amounts from the IRA.

* Premiums based on Male-70, Fem-65, non-tobacco, $711,519 face amount for the

West Coast Life Golden Legacy Protector XSM.

Total Projected Distributions for Proposed Plan:

During John’s Lifetime: $280,038During Jane’s Lifetime: $382,124During Grandchildrens’ Lifetimes: $8,052,533John, Jr.’s Life Insurance: $711,519Subtract Life Insurance Premiums: – $233,612Total Projected Distributions: $9,192,603

Stretch distributions from the IRA will be taxable to the recipient. Distribution amounts shown in this brochure do not reflect the deduction of taxes.

Summary Comparison – Current Plan vs. Proposed Plan

Total Projected Distributions for Current Plan: During John’s Lifetime: $280,038


During John, Jr.’s Lifetime: $1,755,634

Total Projected Distributions: $2,417,796

Total Projected Distributions for Proposed Plan: During John’s Lifetime: $280,038


During Grandchildrens’ Lifetimes: $8,052,533

John, Jr.’s Life Insurance: $711,519

Subtract Life Insurance Premiums: – $233,612

Total Projected Distributions: $9,192,603

Total Projected Planning Advantage: Projected “Proposed Plan” Distributions: $9,192,603

Subtract Projected “Current Plan” Distributions: – $2,417,796

Total Projected Plan Advantage: $6,774,807

Current Plan vs. Proposed Plan

12,000,000

11,000,000

10,000,000

9,000,000

8,000,000

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0

2007

2012

2017

2022

2027

2032

2037

2042

2047

2052

2057

2062

2067

2072

2077

2082

2087

2092

CUM

ULAT

IVE

DIS

TRIB

UTIO

NS

YEARProposed PlanCurrent Plan

8

John’s Death

Jane’s Death


Talk to your financial representative about West Coast Life and multi-generational IRA Planning. You may be able to make your IRA work hard for you AND your loved ones.

Important Notes:These pages depict certain estate planning options for IRA accumulation and distribution. Inclusion of these options does not constitute a recommendation of that option over any other option. This illustration simply shows the potential impact of various accumulation and distribution strategies.

This illustration provides only broad, general guidelines about IRA distribution planning. The quality of the illustration relies, in part, upon the accuracy of the data furnished by you. No tax, estate tax or legal advice is being rendered by this illustration. Rather, this illustration is based on our general understanding of current tax and estate tax laws at the time the report is created. Tax and estate tax laws are subject to change at any time and, therefore, the information presented herein should be reviewed by qualified tax and legal counsel before implementing any specific strategies. Unless otherwise indicated, the tax implications of the federal Generation Skipping Transfer Tax (GSTT) are not reflected.

Calculations contained in this illustration are estimates. Actual results may vary substantially from the figures shown. All assumed rates of return are hypothetical and are not a guarantee of the future performance of any asset or investment. All information regarding interest rates, growth rates, inflation, and tax rates have been provided by you, and should be evaluated periodically for their relevance to your original assumptions.

This illustration evaluates certain strategies for transferring assets upon death. Because property generally passes first by deed, next by contract, and then as directed in the decedent’s will, implementing any of these strategies may entail changing asset ownership, altering beneficiary designations, or revising your will(s).

Because your estate planning intentions may change in the future, you should compare your actual results to your original objectives, discuss the information with your advisors, and make appropriate adjustments as necessary.

9


IMPORTANT INFORMATION

ABOUT 2009 RMDs

The hypothetical examples shown here

reflect Required Minimum Distribution

amounts being taken in 2009. Due to

recent legislation, IRA owners are not

required to take an RMD in the year

2009. For information specific to your

situation, please refer to an illustration

prepared by your financial representative.

Taking additional withdrawals from your

IRA to pay life insurance premiums may

not be your best alternative. Whenever

life insurance premiums exceed your

RMDs, consider paying those premiums

from sources other than your IRA.

About West Coast LifeRepresenting a century of service to the insurance industry, West Coast Life boasts a colorful history of growth and industry “firsts.”

West Coast Life was founded April 2, 1906, in San Francisco, just 16 days before the city’s devastating earthquake and fire. As an indication of the company’s enterprising spirit, West Coast Life was the first company to offer a loan to the city for reconstruction. Within a short period of time, West Coast Life began to grow and pioneered many “firsts” within the life insurance industry.

• ThefirstAmericanlifeinsurancecompanyinHawaii

• ThefirstAmericanlifeinsurancecompanyinthePhilippinesandinChina

• ThefirsttoissueanunemploymentcompensationdisabilitypolicyinAmerica

• ThefirsttoissueagrouppolicywestoftheMississippi

• ThefirsttounderwriteassociationbusinessintheUnitedStates

• Thefirsttoprovideanautomaticpremiumloanprovisioninalifeinsurancepolicy

• And,thefirsttousetheCheck-O-Maticconcept,thenameofwhichwegavetotherest oftheindustry(attherequestofLIAMA,nowknownasLIMRA).*

*WestCoastLifecompanyarchives.

WCLLC.1016 (12.08) www.westcoastlife.com

West Coast Life Golden Legacy Protector XSM, policy form WC-U12 is a flexible premium second-to-die universal life insurance policy. Product features and availability may vary by state. Consult policy for benefits, riders, limitations and exclusions. Subject to underwriting and up to a two-year contestable and suicide period. Policies may not be available in all states. Guarantees are subject to the claims-paying ability of West Coast Life Insurance Company. Policies issued by West Coast Life Insurance Company 343 Sansome Street, San Francisco, CA 94104.

The tax treatment of life insurance is subject to change. Neither West Coast Life nor its representatives offer legal or tax advice. Please consult your legal or tax advisor regarding your individual situation before making any tax-related decisions.

The income tax on an IRA is not due until each distribution is taken. If the participant made non-deductible contributions to the IRA, a portion of the IRA proceeds may be an income tax-free return of basis.

putting your ira to work - bba life...

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