Profile:
- Generally age 60+
- Has a large municipal bond portfolio
- Potential estate tax liability
- Wants to reduce the burden of income and/or estate taxes for beneficiaries
Municipal bond income is generally not subject to federal income taxes. However, many municipal bond owners overlook the fact that the bond itself is subject to estate taxes upon the death of the owner. Muni-Max is the strategy of repositioning all or some of the municipal bond portfolio into life insurance as a means to help increase the overall wealth transfer.
The traditional approach is to use the bond income to purchase life insurance inside an ILIT. However, if the bond owner is unable or unwilling to give up the bond income, an alternative approach may be taken. The owner may sell the bond and purchase single-premium immediate annuity (SPIA) with the after-tax proceeds. Depending on the owner’s age, as well as other factors, the SPIA may provide a larger net after-tax income stream than the bonds.
The difference between the net annuity payment and the previous bond income is used to make gifts to an ILIT to purchase a life insurance policy outside the estate of the insured(s). There may be federal gift-tax consequences associated with the funding of the trust. The life insurance policy is used to replace all or a portion of the municipal bond balance. The result is that net income stays about the same and the heirs, as beneficiaries of the ILIT, receive the desired replacement value of the municipal bond, federal income and estate-tax free.