Municipal Bond Maximization

Situation:

  1. Client is concerned about low returns and high taxes due to the volatility of the stock market and estate tax uncertainty
  2. Client may like the tax-free income provided by their municipal bonds, intending to transfer the bonds at death to heirs, but the value of bonds can be depleted considerably by estate taxes
  3. Client needs a strategy that includes repositioning an inefficient asset to maintain or increase current income, as well as preserve wealth for future generations

Solution:

Your client converts the bonds to a Single Premium Immediate Annuity (SPIA). A life-only no refund SPIA guarantees an income stream to be paid to the client for life. For those who need supplemental retirement income, a SPIA may provide a higher net income than the bonds.

The client can make gifts of a portion of the after-tax income generated from the SPIA to an Irrevocable Life Insurance Trust (ILIT). The ILIT then has the funds to purchase a life insurance policy on the client’s life for an amount that replaces or exceeds the value of the municipal bonds. Since the life insurance is owned by the ILIT, the proceeds will not be part of the taxable estate. Potentially more can be transferred to heirs, estate tax-free, when a SPIA and life insurance policy work together using this approach.

Benefits:

  1. Municipal bonds may be sold with minimal income tax cost
  2. SPIA income can typically provide a higher return than municipal bonds
  3. Life insurance inside an ILIT is generally free of income and estate taxes
  4. The ILIT proceeds can be used to maximize inheritances and transfer wealth to the next generation

Considerations:

  1. The exchange may be taxable and/or result in additional charges and/or risks
  2. Unlike municipal bonds, SPIA income is subject to income tax on all or a portion of the distributions