June 20, 2024

Planning for a SECURE Transfer for your client’s heirs

The estate tax exemption amount in 2024 now stands at $13.61 million per person, or more than $27.2 million for a married couple.* While the changes in the estate tax laws have made it less likely these people will owe estate tax, the passage of the SECURE Act and SECURE Act 2.0 have made it more likely that the heirs of these people will owe significantly more in income tax.

Prior to 2020, a common tax minimization strategy was for a couple to defer taking distributions from retirement plan assets for as long as possible and then to leave such assets to the survivor of them and then to their children, each person having the ability also to defer distributions, only taking out the required minimum amount (RMD) over their life expectancy, which for the children could be 30 years or more. The benefit of that old strategy was that income tax liability could be spread over several decades.

With the passage of the SECURE Act, most heirs are now required to distribute all taxable retirement plan assets by the end of 10 years. This means children who inherit retirement plan assets have to take larger taxable distributions over a shorter period of time and possibly during their peak earning years, creating large income-tax liabilities for them. Many people are uncomfortable with the idea of saddling their children with these potentially large income-tax liabilities and are once again exploring the use of survivorship life insurance to help manage and reduce the overall tax burden imposed upon these assets intended to be passed on to heirs.

Here’s one example of a tax-wise strategy that may work for your clients.

Jack and Jill are age 68 and 66. They have one son, a successful lawyer in his late 30s. He is married to another attorney, who is also doing well in her career. Combined, the son and his wife make more than $400,000 a year.

Jack and Jill’s estate is valued at $4 million. Approximately $2.4 million of it is in a retirement account. If Jack and Jill were to pass away under the current rules and name their son as the beneficiary of this $2.4 million retirement account, there would be no estate tax due, but the retirement account would have to be distributed to their son by the end of 10 years (rather than over his life expectancy, as before). Assuming a 5% return on the inherited retirement account, levelized payments to the son would exceed $300,000 annually, which, when combined with his work income, could subject their son to the marginal income tax rate. 

To help solve this problem, rather than the old strategy of deferring retirement distributions (and the corresponding income taxes) as long as possible, Jack and Jill will spread the distributions (and corresponding income taxes) over as many years (and lower income tax brackets) as they can. They now plan to withdraw approximately 2% of the account value annually, even before age 73, the required beginning date for RMDs. They will pay tax on this $48,000 per year. Since they are debt-free and live a relatively conservative lifestyle, under current tax law, part of the distribution will be taxed at the 12% federal rate and the balance at 22%. They will deposit the net amount into a survivorship life insurance policy, which has a face value of $1.5 million. This will allow them to create a pool of money that will go to their son upon the second spouse’s passing. Under current law, this is income – and estate – tax-free, and have removed the 10-year payout mandate to the son.

Additionally, when Jack turns 70 ½, they can use additional qualified charitable distributions from the retirement plan assets to further reduce their IRA balance and fulfill some of their charitable funding goals. In essence, the life insurance policy proceeds, in addition to their existing assets, allow them to give more money away to both their children and to charity, all while reducing taxes.

Utilizing this strategy, everyone wins. Jack and Jill  get to see their hard-earned assets go to their son in an income tax-efficient manner, and they get to fund their charitable goals with tax-free gifts.

We wanted to share this strategy with our professional advisor colleagues, as it may be appropriate for a number of your emerging affluent clients going forward. We hope that the strategy and the history lesson provide context and value for you and your clients in the future.


(Note that under existing legislation, this amount will decrease in 2026 to an inflated adjusted amount expected to be in the range of $6 million to $7 million per person. Married couples will still be able to combine their exemption amounts via portability.)


Additional Resources

Discussing Charitable Giving With Clients

Five of the Most-Asked Questions about Qualified Charitable Distributions

Charitable Fund Options at The Foundation for Delaware County

Benefits of a Community Foundation for Advisors

Professional Advisor Toolkit