The growth of IRA funds accumulated for retirement now exceeds more than $2.3 trillion dollars as of 2003 in the United States. This figure is sure to increase over the coming years as U.S. residents age and retirement planning comes to the forefront of a larger segment of the population. In many cases, a client having no use of an IRA account for retirement income, may have the intention of passing these funds on to his heirs, but is unaware of the large tax consequences that may ensue.

While the initial contributions and earnings growth are tax deferred, the distribution is another matter entirely. Because the money used to create the IRA was never taxed, an IRA distribution is subject to income tax, and as a large portion of a client's estate, may also be subject to estate taxes, increasing the tax burden. This is where a knowledgeable adviser can be a real asset.

The easiest way to pass wealth on to the next generation is through the use of life insurance. Life insurance carries two main advantages in the transfer of wealth. 1) Life insurance benefits are tax free to the beneficiary. 2) The increase of cash value is tax deferred.

How can a client take advantage of his IRA and pass more of his estate on to his heirs? By using the funds in the IRA to purchase a fixed annuity, and then using the income stream from the annuity to purchase life insurance. The annuity is set up for guaranteed lifetime income in order to assure the ongoing maintenance of the life insurance policy.

Calculate the amount of income needed to purchase the insurance, taking into account the affects of taxation. The after tax income is used to pay the policy premiums, with the heirs named as the beneficiary for the life insurance policy.

At the time of death, the annuity has no value; therefore there are no taxes due. The death benefits are paid to the beneficiary tax-free. Compare this to a situation with no planning, and the IRA being fully taxable at death, and it's easy to see the benefits.

The client will of course be paying income taxes on the annuity income, but with the estate taxes eliminated, the end result should be a tax burden much lower than the combined income tax and estate tax that would be in effect without the proper planning.

Finally, the establishment of the insurance policy should be done within a trust in order to avoid the inclusion of the death benefits as part of one's estate. There are additional tax and legal issues that should be considered. If interested in this concept, you should consult an attorney and tax advisor specializing in estate planning to ensure that your financial plan is structured to meet your particular situation and objectives.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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