 |
  |
|
 |
|
|
Concept
Library
|
||
 |
|
 |
|
Annuity Rescue Plans Case Study Alexander and Joanna Curtis are ages 65 and 60 respectively. Their current net worth is $4,440,000 including $500,000 in a tax deferred variable annuity they have held for some time. (The annuity has a cost basis of $225,000.) Alexander and Joanna require that their assets provide them with $150,000 a year in retirement income plus a cost of living adjustment of 3% a year. Please click here to review a listing of their current assets. Their financial counselor has suggested they purchase $1,600,000 of variable survivor life with five scheduled premium payments of $88,387. If they cash the variable annuity out over five years according to the schedule below, after accounting for their cost basis of $225,000, it will produce $88,387 in after tax funds, the amount needed for the life policy's premiums.
Source: InsMark's InsGift System This article will analyze the impact of this strategy under each of the following conditions:
*ULITs have provisions which also can provide Alexander and Joanna with indirect access to policy cash values. (More on this follows.)
The graphic below compares Alexander and Joanna's current situation (Strategy 1) with Strategy 2 in which after tax annuity values are used to purchase a life insurance policy owned by Alexander and Joanna. Click here to review an illustration of the life policy used in the analysis. Note: Due to the confiscatory taxation of the annuity at death, in Strategy 1, we have used the annuity as the initial source of the needed retirement income. In Strategy 2, the annuity is dedicated to producing the cash flow needed for the life insurance premiums.
The analysis clearly indicates that the life policy is a preferred choice -- both from a net worth viewpoint as well as wealth transferred to heirs. In addition, the life policy's values are "better" values than those in the annuity for the following two reasons:
So far, we vote for the life policy. The graphic below compares Alexander and Joanna's current situation (Strategy 1) with Strategy 3 in which after tax annuity values are used to purchase a life insurance policy owned by an irrevocable life insurance trust (ILIT). Click here for an illustration of the policy used. Note: As with the graph above, due to the confiscatory taxation of the annuity at death, in Strategy 1, we have used the annuity as the initial source of the needed retirement income; however, in Strategy 3, the annuity is dedicated to producing cash flow for gifts to the ILIT for its life insurance premiums. Since, with Strategy 3, the life insurance cash values are owned by the trust, the reduction in Alexander and Joanna's net worth is significant; however, the long-range effect of Strategy 3 on the wealth transferred to heirs is an improvement of almost $3,000,000 (as compared to Strategy 2 shown in the first graphic above). Assuming Alexander and Joanna believe the reduced net worth is still within their comfort zone, Strategy 3 has terrific wealth planning results. It's too bad there isn't a way to keep the cash value of the trust-owned policy potentially available to Alexander and Joanna. Actually, there is . . . The graphic below compares Alexander and Joanna's current situation (Strategy 1) with Strategy 4 in which after tax annuity values are used to purchase a life insurance policy owned by an ultimate irrevocable life insurance trust (ULIT). This is the form of trust discussed in the previous article entitled Grantor Access to Funds in an Irrevocable Life Insurance Trust. It includes four strategies that your clients and their advisers should consider, any one of which can make irrevocable planning less irrevocable. (We believe the most efficient technique is listed under point #3.) Be sure to read this report before proceeding, by clicking here. Note: As with both the graphics above, due to the confiscatory taxation of the annuity at death, in Strategy 1, we have used the annuity as the initial source of the needed retirement income; however, in Strategy 4, the annuity is dedicated to producing cash flow for gifts to the ULIT for its life insurance premiums. The use of the ULIT in Strategy 4 can provide Alexander and Joanna with indirect access to the policy cash values, and they are reflected in the net worth graph above (click here to review an illustration of the policy used). Conclusion: Somewhere among Strategies 2, 3, and 4, Alexander and Joanna will certainly find an annuity alternative to their liking. Illustration Comments: We used version 5.0 of InsGiftÒ -- the Wealthy and WiseÔ System ("InsGift") for the analysis, and InsGift licensees can review all reports and related menu inputs for this analysis by downloading the InsGift Workbook named "MA124.!IG" from this website. On the main page, click on Producer's Center; then on Workbook Download. The Workbook can then be imported into InsGift by selecting Client Workbook/Import Workbook. To download this Workbook now, click here. Note to InsGift users: To see how we illustrated the ULIT's indirect effect on Net Worth, see Scenario #4 in the InsGift Workbook referenced above. (Hint: In Scenario #4, just the policy cash value is listed under the "Other Assets" tab, and the policy premium and death benefit are listed under the "Gift Scheduling" tab.) If you are not licensed for InsGift, please contact InsMark at 1-888-InsMark (467-6275) for licensing information, or click here. P.S. We don't believe there is any source other than InsGift for an analysis like the one contained in this article, and there are tens of thousands of annuity owners out there who will welcome a similar evaluation. |
