Second-to-die life insurance can be a valuable tool for married couples planning for their financial legacy. The death benefit is paid out upon the death of the second insured person. This type of insurance can be used in estate planning to help offset tax ramifications for inherited IRAs, especially considering recent changes to how inherited IRAs are treated under the SECURE Act, passed in December 2019.
Here’s how a second-to-die life insurance policy can help mitigate the tax implications of inherited IRAs for married couples:
- Estate Tax Planning: This insurance can help cover potential estate taxes, ensuring that more of the couple’s assets go to their heirs.
- Income Tax Planning: Under the Secure Act, most non-spouse beneficiaries who inherit an IRA are subject to a 10-year distribution rule. This means they must distribute the entire IRA within ten years, which can lead to potentially higher tax liabilities. Using second-to-die life insurance, the death benefit can offset the income tax implications of these IRA distributions for the couple’s heirs.
- Preservation of the IRA: By using life insurance to cover the anticipated tax liability on the inherited IRA, the couple can potentially preserve more of the original IRA for their heirs. This strategy may be particularly useful as it can help ensure that taxes do not significantly diminish the IRA assets.
- Simplicity and Flexibility: Second-to-die life insurance is often more cost-effective than insuring each spouse individually. It also simplifies the planning process, as the death benefit (typically income tax-free to beneficiaries) is paid out only upon the death of the second spouse. This can provide a straightforward and predictable tool for estate planning purposes.