2005 0420 - ThinkAdvisor - The Capital Transfer Strategy: Math or Magic?, By Donna K. Nearhood - [link]
Donna K. Nearhood, J.D., CLU, ChFC, is an agent for Columbus Life Insurance Company, a unit of Western & Southern Life Financial Group, Cincinnati, Ohio
Using Capital Transfer
Capital transfer means trading an asset such as a non-tax qualified annuity, a CD, or an IRA for a single premium life insurance plan. It provides a tax-efficient way to pass wealth to heirs or to a charity. Capital transfer allows for minimum tax erosion of your assets. Why?
If Alice surrenders the IRA today and pays the income taxes based on the 36% tax bracket, she will have $288,000 to invest in a single premium life insurance contract. That amount can purchase a policy with $762,039 of death benefit guaranteed for her lifetime. Samantha will receive the $762,039 in life insurance death benefit income tax free, vs. the $288,000 left in the IRA after taxation. (See chart.)
Tax efficiency of capital transfer
Capital transfer is nothing more than moving dollars from a tax inefficient investment to a tax efficient investment. What is a tax inefficient asset? A general definition would include assets that result in current income taxation, yield a low rate of interest, or are subject to taxes at one’s death.
What is a tax efficient investment? Life insurance. Life insurance provides both tax deferral during life and a tax-free death benefit.