2. RG Consulting Group, LLC
Executive Summary - Roth Alternative Solution (or Synthetic Roth Strategy)
2010 is the year of the Roth Conversion. The IRS has created a timeline where one
can pay the income tax on their IRA (or 401k or other qualified retirement plan) and
convert it to a Roth IRA, where it can grow capital gains and income tax free.
Anything that is left in the Roth IRA will still be in one’s estate. The largest objection
to this process, other than the fact that it doesn’t solve the estate tax dilemma, is that
most Americans do not have the capital to pay the tax consequence.
Overfunded life insurance policies are likely the only other place where one’s capital
can grow income and capital gains tax-free. Thus, rather than converting an IRA (or
other qualified plan) to a Roth IRA, coming out of pocket for the tax consequence
and having anything remaining in the Roth subject to estate tax, we convert the IRA
to an index UL life insurance policy and finance an amount equivalent to the tax
consequence. The policy is owned by a trust that will not be subject to estate tax.
Indexed Universal Life policies use various indices such as the S&P 500 and are able
to credit at an excess participation rate, while mitigating all downside risk. For
Example, Minnesota Life (Aa3 Moody’s rated) currently has a 140% participation in
the S&P 500 with a 2.5% floor. This means if the S&P gains 5.71% in a point-to-point
year, the excess cash in the policy would be credited 8% (5.71 * 1.40). If the market
were to go down 25%, the cash in the policy would be credited with the 2.5% floor.
The lending aspect of the transaction involves a financing source loaning to a trust.
The loan term is 20 years and can be prepaid at anytime without penalty. Interest
can be paid from the policy’s cash surrender value or capitalized within the loan.
The rate is 6-month LIBOR + 350 bp’s, with a floor rate of 4.0%. As of November 3,
2010, 6-month LIBOR is 0.45%. Currently this loan rate would be 3.95% (thus, the
4.00% floor rate would currently apply). This rate would readjust every 6 months.
The trust used for this transaction would most likely be a South Dakota, Georgia,
Alaska or Delaware-sitused Intentionally-Defective Grantor Trust (IDGT). The
unique aspect of an IDGT is that the insured and beneficiaries are able to access the
cash surrender value of the policy. With this in mind, the client is able to take
withdrawals up to basis, and policy loans if they need income during their life, while
keeping the death benefit of the policy outside of the estate. Thus, generational
wealth transfer is greatly enhanced while maintaining retirement cash flow.
In effect, the Roth Alternative Solution, or Synthetic Roth Strategy, is an enhanced
version of a Roth IRA that optimizes generational wealth transfer while effectively
shielding one’s retirement nest-egg from market downturns. The capital in the
policy will grow annually, normally without income tax and capital gains tax. The
original tax consequence due to qualified plan conversion is financed. The insurance
products have guaranteed floors to mitigate all downside risk and to promote
growth and preservation of capital, and excess participation to achieve returns
above those of traditional equity market indices. All of this occurs while keeping the
asset out of one’s estate by using an Intentionally Defective Grantor Trust.
Ryshard Grzanka, RG Consulting Group, LLC
Phone: (917) 715-0758 rg@rgllc.net
THIS SUMMARY IS NOT AN OFFER OR A COMMITMENT TO EXTEND CREDIT IN ANY FORM AND REMAINS SUBJECT TO, AMONG
OTHER THINGS; (I) CREDIT APPROVAL, (II) DUE DILIGENCE AND (III) MUTUALLY SATISFACTORY DOCUMENTATION.
RG Consulting Group, LLC., makes no warranties or representations as to the accuracy and completeness of the
information contained in this communication, including any attachment(s) thereto. The information contained herein is
provided for the convenience of the recipient without any warranty of any kind, express or implied, and are not intended to
provide specific advice or recommendations for any individual or entity. RG Consulting Group, LLC., recommends that
the intended recipient consult their own attorney, accountant or tax advisor with regard to their individual situation.