Legacy Asset Transfer
Repositioning Assets
If your client owns an annuity (or other pre-tax or tax-deferred investment) which he plans to give to his heirs, your client may not pass along as much as you think. Income taxes and estate taxes can erode half of an estate—drastically reducing the legacy plan to transfer to heirs. Life insurance can be an excellent alternative for those unneeded assets. Your client only has to access the money in his annuity (through withdrawals, annuitization or surrender) and pay income taxes on any earnings. Then this money is used to purchase a properly structured life insurance policy, which will provide for his heirs without burdening them with income taxes or estate taxes.
Of course, this strategy only makes sense for people who can qualify for life insurance and, because one could face a 10% IRS penalty tax if the annuity is cancelled before age 591/2, it’s best to consider this idea only if your client is over that age. Your client could also face company surrender penalties, so be sure to investigate the terms of the annuity before deciding to cancel your client's current annuity.
If this idea still sounds good, take a look at this example to see how much more could be provided to heirs by using life insurance rather than simply holding an unneeded asset. Keep in mind, this example uses an annuity asset but the effects of income and estate taxes on a qualified plan (IRA, 401(k), etc.) passing to a non-spouse beneficiary are just as dramatic.
Problem
Simon Miller is a 71-year-old male with a $100,000 annuity that he originally purchased for $30,000. Through other investments and savings, Simon is confident he can meet all his and his wife’s financial needs, so he intends to leave the $100,000 annuity asset to his daughter, Rachel. However, because an annuity is subject to income and estate taxes at transfer, Simon’s asset will shrink by more than half with only about $45,000 of the annuity’s $100,000 value passing to Rachel.
| Annuity Value to Heirs with No Life Insurance Hypothetical example. Your results may vary. | ||
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Annuity Value (before taxes)
Estimated Federal Estate Taxes of 45%
Beneficiary’s Estimated Income Tax* |
$ 100,000
45,000
8,750 |
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| Annuity Value (after taxes) |
$ 46,250 | |
* Includes income tax deduction allowed beneficiaries based on the amount of the estate tax attributable to the annuity, which is considered income in respect of a decedent (IRD). The amount of the income tax deduction is the difference between the estate tax due including the annuity and the estate tax due excluding the annuity. | ||
Solution
Simon wants to avoid this tax scenario and help make sure his daughter gets the inheritance she deserves so he surrenders his $100,000 annuity, pays the income taxes he owes in his 35% tax bracket, and purchases life insurance through a properly structured trust.
After paying income taxes of $24,500, he has $75,500 that he uses to purchase universal life insurance in a properly structured trust. He qualifies for $131,544 of coverage which Rachel and her family will receive at his death—free of income and estate taxes.
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Value to Heirs with Life Insurance | ||
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Annuity Value (before taxes)
Income Taxes Owed on the Annuity’s Profit
Amount Available for Insurance Premium |
$ 100,000
24,500
75,500 |
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| Life Insurance Benefit (No Load Universal Life, standard, male, age 71) |
$ 179,954 | |
The solution worked and the results were impressive. Simon was able to leave his daughter more than twice as much money using life insurance.
How Can Ameritas Advisor Services Help?
Both Ameritas No-Load Universal Life Insurance and Ameritas Low-Load Variable Universal Life Insurance may be able to help implement this concept. For more information call the Ameritas Advisor Services salaried professionals.
These ideas reflect our current understanding of applicable law. Ameritas Life Insurance Corp. and its representatives do not provide tax or legal advice. You should consult your own tax or legal adviser regarding your unique situation.
The Ameritas Low-Load Universal Life insurance policy (Form 3157) is issued by Ameritas Life Insurance Corp.
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