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Qualified Plans Can Help Heirs, Too

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NU Online News Service, Feb. 9, 2004, 12:33 p.m. EST – Remember that a qualified retirement plan can be an estate-planning tool.[@@]

That’s the advice that a sales expert at Manulife Financial Corp., Toronto, has for agents who are trying to persuade business owners to set up plans.

Randy Zipse, vice president of advanced markets at Manulife’s Manulife U.S.A. unit, says using distributions from a 401(k) plan or other qualified retirement plan to buy life insurance can give highly paid executives significant tax advantages.

Under this arrangement, a client uses plan proceeds to fund a wealth transfer plan inside an irrevocable life insurance trust. If properly set up, the trust is outside the individual’s taxable estate and can receive life insurance proceeds free of estate and income taxes, Zipse says. The arrangement also cuts the client’s qualified plan assets and hence the size of the taxable estate.

Funding a life policy with retirement assets would help a highly compensated client create liquidity in the estate if the client dies, while avoiding the double crunch of federal estate and income tax that can result when required pension plan distributions are allowed to accumulate inside a client’s estate.

Manulife is offering agents a software-based illustration system that would help them explain the advantages of the concept to business owners and other wealthy clients.

“A lot of insurance folks got away from how qualified plan assets historically have been used in estate plans,” Zipse says. “This is a way to refresh agents and advisors on how you can use a qualified plan in a normal way to use the distribution during the individual’s lifetime. The idea is to take a little of it now while you’re still alive to fund an irrevocable insurance trust so, if you die, you will have created liquidity, and your estate can avoid paying the income tax on those distributions.”


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