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DESCENDENT WEALTH IRA

FINANCIA L SITUATION
Having worked hard and planned well, an IRA owner may find that the accumulated funds of the
IRA are not needed for retirement. The IRA likely has considerable value. Since a traditional IRA
is subject to both estate and income taxes, over half of its value may be depleted by the time the
beneficiaries receive any benefit. A Roth IRA, on the other hand, has several important advantages
over a traditional IRA. A Roth IRA is not subject to Required Minimum Distributions (RMD), income
tax upon distribution, or Income in Respect to a Decedent (IRD) upon receipt by beneficiaries after
the IRA owner’s death.

When converting a traditional IRA to a Roth, income tax must be paid on the IRA assets. By using
life insurance to fund the income tax that must be paid upon the conversion, the full value of the
IRA can be preserved. To maximize the value of a Roth IRA to the named beneficiary upon the
owner’s death, an additional insurance policy may be obtained to pay for the estate tax that will be
attributable to the Roth IRA upon the owner’s death.

The following is a strategy to help maximize the value of the IRA, when the spouse is the IRA
beneficiary named on the traditional IRA.

POSSIBLE SOLUTION
Consider preparing for the future by converting a traditional IRA to a Roth IRA upon the IRA
owner’s death. Anytime after the IRA owner reaches the age of 59½, when there is no penalty for
the withdrawal of funds from the IRA, he/she withdraws an amount sufficient to purchase a life
insurance policy. Because a Roth conversion is subject to income taxation, this solution provides
a source of liquidity to pay the taxes. At the IRA owner’s death, the traditional IRA is passed to the
spouse (without estate taxes under the Unlimited Marital Deduction)1. The spouse converts the
traditional IRA to a Roth IRA, (provided he/she meets the income cap for Roth conversions, which
no longer applies after 2009). The major benefits of the Roth IRA are that there are no distribution
requirements and any distributions taken are income tax free. The spouse, who does not need the
amounts held in the Roth IRA, allows the Roth to grow, to be distributed to the beneficiaries
upon his/her death. In order to keep the entire Roth IRA intact at the second spouse’s death, a
second insurance policy, funded from RMD (or other sources), could be used to pay the estate tax
attributable to the Roth IRA. Not only will the children receive the Roth IRA income and estate tax
free, they may elect to stretch the Roth payments over their lifetimes, taking further advantage of
the tax-free growth and distributions afforded a Roth.

1
Subject to the QDOT rules for non-US citizen spouse. See IRC § 2056A and related regulations.

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STRATEGY

IRA NET IRA At death transfer to spouse.

Owner withdraws Spouse converts to a Roth IRA.

At owner’s death,
funds from IRA to
insurance proceeds
fund the purchase
are used to pay
of a life insurance
income tax on the At spouse’s death, insurance
policy on his/her
conversion to a proceeds may be used to pay estate
life owned by
Roth IRA. tax. Heirs inherit Roth IRA and
spouse.2
receive distributions tax free.

RESULTS AND EXAMPLES

Today, husband and wife are both 71 years old. His IRA is valued at $3,000,000 and growing at 6%
per year. After taking into account his annual Required Minimum Distributions (RMDs), the balance
of his IRA in 15 years (his life expectancy) would be $3,455,000. If his wife survives him by 5 years,
the net amount left to their heirs would be approximately $1,426,000 after estate and income tax
(Income in Respect of a Decedent) are paid out of the Roth funds.

Due to his age, the husband is required to take RMDs from his IRA. He will use a portion of his
distribution, $41,067 annually, to pay the premiums on a $1,300,000 life insurance policy.3 At his death,
the IRA will pass to the spouse without estate tax using the Unlimited Marital Deduction, and she will
convert it to a Roth IRA (assuming she meets the income limits which no longer apply after 2009).

The wife uses the $1,300,000 life insurance policy proceeds to pay the income tax due on the Roth
conversion, thereby allowing the full $3,455,000 IRA to be converted to a Roth IRA. In this case, the
income tax due upon the conversion would be approximately $1,200,000.4 When the spouse passes
away 5 years later, the Roth IRA will be worth $4,600,000. Anticipating that the Roth IRA will be
subject to estate tax, the couple purchases a survivorship life insurance policy using an additional
portion of the Husband’s net RMD which will be used to pay the estate tax attributable to the Roth
2
Owner gifts funds to spouse tax free using the Unlimited Marital Deduction.
3
Sun Universal Protector® (LP3), 71 year old male, preferred non-tobacco
4
Income tax calculated at 35% rate (top marginal bracket) because $3,455,367 of income is recognized in year 15 due to Roth
conversion.

Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal government entity.
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IRA. They purchase a $2,000,000 survivorship policy payable for 15 years.5 After the conversion,
subsequent distributions from the Roth IRA to the children will be estate and income tax free.

Using this strategy, the children inherit more than three times as much!

VALUE OF IRA LEFT TO BENEFICIARIES AFTER ESTATE AND INCOME TAXES

Year Value of IRA Net RMD8 End of Year Estate Tax Due Income Tax Due Net to
Balance on IRA on IRA Beneficiaries
15 $3,481,715 $157,618 $3,455,367 0 0 $3,455,367
(to Spouse)

20 $3,227,422 $189,682 $3,137,967 $1,096,111 $615,4169 $1,426,434

VALUE OF IRA LEFT TO BENEFICIARIES AFTER CONVERTING TO A ROTH IRA AFTER FIRST SPOUSE’S DEATH

Year Value of IRA Net RMD8 End of Year Life Life Income Tax Due Value of Net to
Balance Insurance Insurance on Conversion to Roth IRA Beneficiaries
Premium Death Roth IRA after Estate
Benefit Taxes
15 $3,481,715 $152,913 $3,455,367 $41,0673 $1,300,000 $1,209,3784 $3,455,367 $3,455,367
1st death (Paid annually Proceeds from Paid with (to spouse)
years 1-15) policy on the insurance
$43,09245 IRA owner proceeds
(Paid annually
years 1-15)

20 $4,362,321 0 $4,624,061 0 $2,000,000 Estate tax due6 $4,624,061 $4,440,0277

Proceeds from $2,184,034
the survivorship
policy

Contact our Advanced Planning Attorneys at

800-432-1102, ext. 1846, 1756, 1838, or 1969,
or Advanced Case Design at ext. 2450.

5
Sun Survivorship UL®, 71 year old male and female, preferred non-tobacco, 15 pay. All life insurance premiums are assumed to be paid with RMDs.
6
Assumes death occurs after 2010 and the pre-EGTRRA marginal estate tax rate of 55% applies.
7
Amount to beneficiaries is reduced by $184,034 used to pay the balance of estate tax not covered by insurance proceeds.
8
Net RMD is RMD minus income tax at 35%.
9
Income in Respect of a Decedent is calculated at a 35% income tax rate.
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ABOUT SUN LIFE FINANCIA L

Sun Life Financial is a leading international financial services organization providing a
diverse range of wealth accumulation and protection products and services to individuals
and corporate customers. Chartered in 1865, Sun Life Financial and its partners today
have operations in key markets worldwide including Canada, the United States, the
United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China
and Bermuda. Sun Life Financial Inc. trades on the Toronto (TSX), New York (NYSE) and
Philippine (PSE) stock exchanges under the ticker symbol SLF.

This material contains references to concepts that have significant legal, accounting and tax
implications. It is not intended as legal, accounting or tax advice. Clients should always consult with their
own attorney and/or tax advisor regarding the application of these concepts to any particular situation.

Sun Life Assurance Company of Canada and Sun Life Insurance and Annuity Company of New York
are members of the Insurance Marketplace Standards Association (IMSA).

Universal Life Insurance products are issued by Sun Life Assurance Company of Canada. In New York, Universal Life Insurance
products are issued by Sun Life Insurance and Annuity Company of New York.
All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada, Sun Life
Assurance Company of Canada (U.S.), or in New York, Sun Life Insurance and Annuity Company of New York. All are members of
the Sun Life Financial group of companies.
©2007 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered
trademarks of Sun Life Assurance Company of Canada.

XMSD 44/637
SLPC 18042 10/07
Exp. Date 06/10

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NOT FOR USE WITH THE PUBLIC.