Disinheriting the IRS: Leveraging Life Insurance to Navigate Secure Act 2.0

This case study explores a hypothetical scenario in which an individual, faced with the changes introduced by the Secure Act 2.0, seeks to disinherit the IRS by strategically purchasing a life insurance policy. The Secure Act 2.0 eliminated the stretch IRA for non-spousal beneficiaries, impacting long-term tax planning for heirs. This case study delves into the potential benefits and considerations involved in using life insurance as a tool to mitigate tax liabilities and ensure wealth transfer objectives are met. 

The Secure Act 2.0, passed in response to the evolving landscape of retirement planning and taxation, brought significant changes to estate planning for non-spousal beneficiaries of inherited IRA's. One of the most notable changes was the elimination of the stretch IRA, which allowed beneficiaries to stretch required minimum distributions (RMDs) over their lifetimes, thereby reducing the tax burden. In this case study, we follow the fictional journey of Mr. Anderson, a 65-year-old investor with a substantial traditional IRA, as he explores the use of life insurance to disinherit the IRS.

John is a successful entrepreneur who has diligently saved for retirement through his traditional IRA. With the passing of Secure Act 2.0, he realized that his heirs, primarily his two adult children, will face substantial tax consequences due to the accelerated distribution requirements for inherited IRAs. Concerned about preserving his wealth for future generations while minimizing tax implications, John consults with his financial advisors at The Pitti Group Wealth Management, and his estate planning attorney. 
 

1. Understanding the Problem: John learns about the Secure Act 2.0's impact on non-spousal beneficiaries, which requires them to deplete the inherited IRA within a 10-year period, potentially subjecting them to higher tax brackets and diminishing the legacy he intends to leave for his children.
    
2. Strategizing with Financial Advisors: John and his financial advisor, discuss the use of life insurance as a tax-efficient wealth transfer strategy. The advisor educates John on how a well-structured life insurance policy can provide income-tax-free death benefits to his beneficiaries. 
    
3. Selecting the Appropriate Policy: After analyzing John's financial situation, the advisor recommends a type of permanent insurance policy with a death benefit sufficient to replace the anticipated tax liability from the inherited IRA. This approach allows John to ensure his heirs receive a substantial inheritance while mitigating the impact of the Secure Act 2.0.
    
4. Structuring the Policy: John decides to establish an irrevocable life insurance trust (ILIT) to own the life insurance policy. This structure prevents the insurance proceeds from being included in his estate for estate tax purposes, providing additional tax benefits to his heirs. 
    
5. Funding the Premiums: John funds the premiums for the life insurance policy by systematically withdrawing funds from his traditional IRA. These withdrawals are made within his current tax bracket, and the after-tax amount is used to pay the premiums. This strategy optimizes the use of his IRA assets. 
    
6. Reviewing the Plan Periodically: John and The Pitti Group maintain a regular schedule to ensure the policy aligns with his evolving financial situation and goals. Adjustments are made as necessary to ensure the policy remains effective. 

By strategically purchasing a life insurance policy within an irrevocable life insurance trust (ILIT), John successfully navigated the challenges posed by the Secure Act 2.0. This approach allowed him to disinherit the IRS, ensuring that his heirs receive a substantial tax-free inheritance while minimizing the impact of the accelerated distribution requirement on his traditional IRA. Through careful planning and collaboration with financial and legal professionals, John's estate plan efficiently transfers wealth to the next generation, demonstrating the importance of proactive financial and estate planning in the ever-changing landscape of tax regulations. 

The Pitti Group Wealth Management LLC (“the Pitti Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where the Pitti Group and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at thepittigroup.com

The fictional scenario detailed above is purely hypothetical and is not representative of actual client experience, which may differ substantially. The Pitti Group makes no guarantee about the outcome of any similar real life circumstance that a client or prospective client of the Pitti Group may find themselves in. This information is being shared for illustrative purposes only.