To download a 7-page consumer educational piece on L&L, click on the following link (this piece compares passing a tax-deferred IRA to the heirs, a Roth IRA, or tax-free dollars from L&L):
https://advisorshare.com/l-and-l
Legacy Planning
For years, retirees have been told the same story. “If you want to leave more money for your children, convert your IRA to a Roth IRA.” The logic sounds simple:
-Pay taxes now
-Avoid taxes later
-Leave tax-free assets to your heirs
Unfortunately, retirement planning isn’t that simple.
One of the biggest mistakes retirees make is assuming that a Roth conversion is the best way to pass wealth to their heirs. Sometimes it is; sometimes it isn’t; and the difference can mean hundreds of thousands of dollars to the heirs.
There is $40 trillion in tax-deferred wealth between IRAs, 401(k) plans, and government deferred comp plans. There are millions of consumers who have significant wealth (some $1 million or more) in their IRAs that they will NEVER use. These are the clients who are candidates for L&L.
What is L&L
L&L is a concept that’s been around for 25+ years. I forgot how powerful it can be as a wealth transfer tool and why it can be a great alternative to Roth IRA conversions.
L&L is simply when a client “leverages” their tax-deferred assets to create a bigger pool of tax-free wealth for the heirs.
All a client does is withdraw a portion of their IRA assets and use the after-tax proceeds to purchase life insurance. The life insurance then creates a tax-free death benefit that passes directly to the beneficiaries upon the death of the insured.
The question is simply whether the math works better than Roth conversions.
As for Roth conversions, unfortunately, most advisors are NOT running Roth conversion numbers correctly. When you do, you’ll find that conversions DO NOT work 85% of the time for clients if the goal is more money available while alive. This is why we spent nearly two years building our OnPointe Roth conversion software, why we wrote our book Deconstructing Roth IRA Conversions: Myth vs. Reality, and why we developed the Certified Roth Conversion Specialist™ (CRCS™) designation.
2nd-to-die—to improve the likelihood of success for L&L, couples who can buy a 2nd-to-die policy designed for maximum death benefit are the best fit.
Example—the detailed numbers for this entire example are in the downloadable client piece.
• A married couple, both age 62.
• The husband is in good health.
• The wife is in excellent health.
• They have one child aged 30.
• 6% gross rate of return on investable assets
Retirement Assets:
• $1.5 million in a traditional IRA
• $350,000 in a brokerage account
• $70,000 of Social Security income
• Annual spending needs of approximately $125,000
If the couple withdrew $70,000 a year annually from their tax-deferred IRA and used the after-tax proceeds to fund a life policy, here is the total wealth difference for the heirs at the end of their 10-year IRA inherited time period…+$928,089. Which will your client’s heirs like better?
So, if you want to bring a simple and not often used concept to some of your Roth IRA conversion clients (or those you think conversion may work for), you should start modeling L&L.
RoccyKnows YouTube Channel
Beware of Bonus Annuities to Pay the Tax on Roth Conversions
Every week I plan to post a NEW YouTube video. Last week’s was on my favorite topic: why I am not a fan of “fee-only” advisors. This week’s is Bonus Annuities for Roth Conversions.
To watch the NEW consumer YouTube video, click on the following link or video:
https://www.youtube.com/@RoccyKnows/videos
13-Page White Paper
Why Bonus FIAs to “Pay the Tax” on Roth Conversions are a Failure
While my YouTube video is for consumers, I do have a detailed white paper on why bonus annuities are a mathematical loser for Roth conversions. Click on the following to download:
