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A Wealth Replacement Strategy Using Your IRA Distributions

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by Michael Schwartz '59

Retirement plan assets may be the most tax-advantaged assets to leave to charity. In this article, Michael Schwartz ’59 outlines a method to use required minimum distributions to purchase life insurance to replace for your heirs the value of a retirement plan gift that will someday go to Clarkson.

A Wealth Replacement Strategy Using Your IRA Distributions           
by Michael Schwartz ’59, Master of Science in Financial Services

The Protecting Americans From Tax Hikes Act of 2015 (PATH) made permanent the IRA Charitable Rollover, allowing individuals 70 1/2 and older to make gifts up to $100,000 to charity directly from your IRA on an annual basis. Now, let’s consider the option of making Clarkson University the beneficiary of your IRA upon your death and your spouse’s, if applicable.

When left to your heirs, the IRA will be taxed as ordinary income. Why not consider using your Required Minimum Distribution (RMD) to purchase a life insurance policy with your heirs as the beneficiaries. This would provide income tax free dollars to replace the taxable IRA distributions.

Let’s look at a hypothetical situation. The RMD from an IRA starts April 1st after the 70½ birthday. Our donor’s IRA is $500,000 and he would like to leave the entire amount to Clarkson. What happens if nothing is done? Since the contributions are tax deductible going in, the distributions are taxed as ordinary income.  Therefore, the taxing authority will come and take $200,000, leaving your heirs with approximately $300,000. The RMD would be approximately $32,000, before taxes, at age 72.

Let’s look at using life insurance. The numbers I am using are not from any specific insurance company and assume standard health. The amount could be more or less depending on health. Assuming the age of 72 for the husband and 70 for the wife, 72 for the male alone and 72 for the female alone. The cost for $500,000 for the husband and wife, paid upon the second death, would be in the range of $11,000. The male alone, $20,000 and the female alone, $13,000.

The net result is that Clarkson University receives $500,000 and your heirs receive $500,000 income tax free.

Your combined legacy is now $1,000,000! This is more than triple the after tax benefit of $300,000.

Michael Schwartz '59 lives in Berwyn, PA with his wife Esther.  They have two children, Grant and Suzanne. Questions can be directed to Michael at mpschwartz44@gmail.com or call 610-283-5510.

Clarkson University does not endorse any particular tax or estate planning strategy, but presents ideas for discussion and evaluation to individual circumstances. This web page does not provide legal or financial advice, nor is it a comprehensive review of the topic. You should consult your legal and financial advisors and Clarkson University before making or planning your gift. (rev. 5/2016)