Farrell: Complex tax strategies call for due diligence

Q: My wife and I are retired boomers with decent defined-benefit pensions. We don't really need the money in our qualified (tax-deferred) savings to live on, so we would like to minimize the tax hit of cashing in and pass it on as much as possible to the kids and grandkids. Our current balance is $188,000.

We've recently been pitched a "second to die" whole-life insurance policy as a way to do this. The idea is to purchase $400,000 of coverage costing an annual premium of $10,000, presumably paid from the qualified accounts. The idea is to incrementally reduce our balances (as required after 70½ years of age), and once both of us die, our beneficiaries would get the $400,000 insurance payout tax-free. But, if we live long enough, the cash value of the whole-life policy would continue to grow and surpass the actual total of the premiums and there would be a $400,000 paid up insurance policy waiting for our heirs tax-free.

I know you're not a fan of whole life, but is this creative use of whole life good for neutralizing some of the tax downside to qualified savings accounts?

Gene

A: Move carefully before doing anything. There are a lot of moving parts to understand before adopting a complex financial strategy such as this one. You have to delve way deeper than the salesman's "pitch."

The transaction you're considering comes with many questions and a number of bells, whistles, financial trade-offs and investment assumptions. You'll want a very clear picture before acting to make sure it's the right financial move for you. (Is my skepticism showing?)

Secondly, I respect your desire to pass on savings to your heirs and to be financially smart about it. However, my second ­caution is even though you're doing well now I hope your personal financial blueprint takes into account spending more on yourselves for experiences, perhaps with your heirs.

To get additional insight, I ran your question past Julie Krieger, partner and wealth adviser at Evercore Wealth Management in downtown Minneapolis. She suggested an intriguing alternative strategy to consider that offers the benefit of greater financial flexibility.

You could consider converting your tax-deferred accounts into one Roth IRA account in each of your names. You could accomplish the conversion over a number of years to lower the tax hit, she advises. The goal would be for the taxes to be paid from another source (such as a savings account), which would maximize the Roth IRA balances.

"The Roth IRA can grow tax-free, which also offers more flexibility and future financial security to the couple if [for example] they were to need the resources for their health care or long-term care," she says. Then you could gift the Roth to your heirs when you're both gone.

Krieger mentioned other details to take into account when contemplating this strategy. You'll need to run the numbers and align this and any other potential moves into an overall financial plan.