CategoryAsset Protection

A Creative Idea for “Supercharging” Your IRA – Part 2

Ok, so you read my previous post about the incredible legacy you can create by “Supercharging” your IRA.  The logical questions are: what are the drawbacks to the “traditional” approach to IRA beneficiary planning and how do I do the “supercharged” strategy?  Well, I’m glad you asked.  That is what this post is about.

So, how is IRA beneficiary planning typically done and what are the drawbacks?  Usually, a married couple will name each other as the beneficiary of their IRAs.  This is done for many reasons, two of the most common being love and the additional “rollover” options provided to a surviving spouse by the tax code.  Yet, there is a problem . . . spouses are usually near the same age.  That means when the first spouse dies, the “stretch” tax deferral period of the deceased’s spouse’s IRA will typically be rather short.  This goes against the goal of many IRA holders’ desire to maximize the “stretch” period to take full advantage of the tax-deferred growth of their IRA after their passing.

One option is to name a person from a younger generation as the beneficiary of the IRA.  There’s a problem with that too . . . the surviving spouse is left out of enjoying the “fruits of labor” from the IRA.  The “Supercharged IRA” strategy mentioned above is the way to have your cake and eat it too.

In this strategy, a younger person is named as the beneficiary of the IRA.  Or better yet, an IRA Legacy Trust for the benefit of younger people is named so that you can not only maximize the “stretch” tax-deferral period but also make sure the IRA proceeds are asset protected for future generations (from creditors, predators, divorce and poor spending habits).  As mentioned in my previous post, the required minimum distributions from the IRA are used to purchase a permanent life insurance policy on the life of the IRA holder with the spouse named as the primary beneficiary (or better yet, an Irrevocable Life Insurance Trust purchases and holds the policy so that it is asset protected from the insured’s creditors, predators and potential divorce).

What is accomplished?  The IRA tax-deferral stretch is much greater because a younger person is beneficiary and the surviving spouse doesn’t miss the IRA benefits because he or she receives the insurance proceeds, which can be much greater than the IRA due to leveraging the life insurance premium.  An additional benefit of this strategy is that it can be used for non-traditional couples and single individuals.

Make sure to discuss this strategy with a financial adviser, life insurance agent and estate planning attorney who are familiar with it and accustom to the mechanics of implementing it in your situation.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

A Creative Idea for “Supercharging” Your IRA – Part 1

As a Grand Rapids, MI estate planning attorney, I regularly help individuals and families plan for how to transfer their IRA accounts according to the legacy they want to leave.  One scenario that provides an incredible opportunity is when you don’t need the required minimum distributions (RMDs) for living expenses.  If you don’t need your traditional IRA funds to live on during retirement, you may be focused on building up this nest egg for your children or other loved ones and be tempted to avoid taking any withdrawals from it. After all, the larger your IRA is, the larger your children’s inheritance will be, right?

Unfortunately, this isn’t necessarily the case. After age 70½  you must take RMDs annually. If you don’t, you’ll owe a 50% penalty on the amount you should have taken but didn’t — in addition to any ordinary income tax you owe. So, for example, if your RMD was $12,000 for a given calendar year, you would owe a $6,000 penalty. That’s $6,000 that would go to “Uncle Sam” rather than to a loved one or charity.

A much better option can be to take the RMD, pay the ordinary income tax on it and use the remaining amount to pay the premium on a life insurance policy.  This strategy can “supercharge” your retirement plan by providing a way to maximize the “stretch out” of RMD payments after your death, lengthening the tax deferral period. The longer the RMDs are “stretched out,” the longer the IRA assets can grow tax deferred.  Then you can use the RMD payments to leverage the benefits of life insurance to greatly increase the ultimate amount received by your loved ones, charities or others.

Curious how it works and how you can use it?  Stay tuned . . . I will cover that in a future blog post.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Protecting the Cash Value of Life Insurance in Michigan

If you read my previous, you know that the cash value of life insurance may not be protected from creditors in Michigan – it is still questionable.  As a Michigan estate planning attorney, I’ve seen the disappointment on some faces when I explain the current state of affairs.  Then they ask the logical question . . . “well, is there any way that I can protect it for sure?”

The answer is yes!  Although there may be other ways, one good way to protect the cash value of life insurance in Michigan is by having the insurance in an Irrevocable Life Insurance Trust – many times referred to as an ILIT.

In simple terms, an ILIT is an irrevocable trust that is the owner of one or more life insurance policies.  Although it may go without saying, because it is irrevocable it cannot be revoked or amended.  A an additional key component is that the person whose life is insured cannot retain any “incidents of ownership.”  Although not comprehensive, a good overview of “incidents of ownership” can be found here.  Because you do not “own” the insurance, it is not available to creditors . . . that is what protects it.

Please note that an ILIT is an advanced estate planning technique and is rather intricate in its creation and operation.  Run, don’t walk, away from any attorney who say they are “simple” or a “piece of cake”, or those that don’t ask you very many questions before drafting it.

What you read above is an enormous simplification of how ILITs work.  Do NOT try to draft or implement an ILIT on your own.  Make sure to work with a dedicated estate planning attorney that is familiar with ILITs and their intricacies.  Otherwise you will spend your money on something that won’t do much for you.

Call us at 616-827-7596 to determine if an ILIT can protect the cash value of your life insurance.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Is Life Insurance Asset Protected in Michigan?

As a Grand Rapids, Michigan estate planning and asset protection attorney I’ve been asked several times, “Is life insurance protected from my creditors?”  And sometimes it’s more specific, “is the cash value of life insurance protected from my creditors.”

Well, the answer is maybe yes, maybe no.  You see, there is a seeming incompatibility between the statutory law and the case law (court-based law) in Michigan.  In MCL 500.2207(1) it says that the proceeds of any life insurance policy payable to the wife, husband or children of the insured or to a trust for their benefit, including the cash value thereof, is exempt from claims of the insured’s creditors (read it by clicking here).

Seems to be pretty clear, right?  Wrong.  There are a couple of cases in Michigan where creditors were allowed to garnish the cash value of the insured’s (debtor’s) life insurance policy.  The cases are:

  • Chrysler First Business Credit Corporation v. Rotenberg v John Hancock Mutual Life Insurance Co., 789 F. Supp 870 (1992) – read it by clicking here.
  • Schenck Boncher & Prasher v. Vanderlaan, 2003 Mich. App. Lexis 2082 (2003) – read it by clicking here

Well that sort of muddies the water, doesn’t it?  And if you go back to MCL 500.2207(1) and read it in the context of 500.2207(2), you could read “cash value” to reference not the cash value during the insured’s lifetime, but rather only the cash value component of the proceeds after the insured’s death.

Here’s the kicker . . . there IS a way to fully protect life insurance cash value from creditors.  That is the topic of a future blog post, so make sure to check back regularly.

And if you (or your client/customer) can’t wait that long.  Call us at 616-827-7596 to schedule a Peace of Mind Planning Session to discover how to asset protect and tax-proof your life insurance and create a lasting legacy for generations to come.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Asset Protection with Discretionary Trusts

Many Grand Rapids families that I talk with have never considered anything other than giving their assets to their family outright – it could be immediately when they pass away or at some later age.  As a Grand Rapids, Michigan estate planning attorney I consider it my privilege to let them know the downside to that approach and what can be gained by putting some restrictions in their Michigan will or trust.

I came across an excellent example in a recent Michigan Court of Appeals case (read it here).  The basics of the case are this: the beneficiary of the trust had been jailed and the State of Michigan was seeking reimbursement for those costs from the trust.  Guess what?  They couldn’t get to the trust assets!  Why?  Because it was a “discretionary” trust.

What is a discretionary trust?  It is a trust that does not distribute the assets outright, but rather leaves the decisions on what is distributed and when it’s distributed to the discretion of the trustee.  You can find the Michigan Trust Code definition here (MCL 700.7103(d)).  You see, because the “inheritance” is not given outright to the beneficiary and the beneficiary does not have a right to demand that the trustee give him or her any of the trust assets, the trust assets are not considered the beneficiary’s assets.

The best part – even though the trust assets aren’t considered the beneficiary’s assets, the beneficiary can benefit from the trust in the trustee’s discretion as guided by the trust language itself.  Think of it this way . . . by setting up your trust this way you are benefiting your family and at the same time protecting them from creditors, predators, divorce and possibly their own poor spending habits.  Now THAT is truly creating a legacy.

Call us at 616-827-7596 to discover how you can provide these incredible benefits to your family!

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.