 |
  |
|
 |
|
|
Product Center
|
||
 |
|
 |
|
|
Charitable Bequest of Annuity Assets The illustrations and graphics for this Case study were done using Wealthy and Wise® (previously named "InsGift"), which has been enhanced to reflect the estate tax changes enacted in June 2001. This evaluation involves Paul and Sarah Montgomery, ages 65 and 60 respectively. They have two children. Their current net worth is a little over $3.5 million and, based on their assumptions, after their personal retirement cash flow needs are met, their estate is expected grow to $15 million over the next 30 years. Included in their assets is $500,000 in a tax deferred annuity with a cost basis of $300,000. Due to the heavy "death tax" on annuities, they are analyzing the consequences of naming a charity the ultimate beneficiary of their annuity. With this approach, Paul and Sarah can retain the annuity asset in their names (in case they need the funds); however, it also eliminates the tax bite on the annuity at death -- currently 62% and ranging as high as 78% (estate tax plus IRD). The cost to their heirs is minimal, yet the strategy establishes a substantial gift to charity -- ultimately in excess of $5 million. The analysis of "not doing it" (Strategy 1) vs. "doing it" (Strategy 2) can be seen in the first Comparison section -- Compare Options #1. (In Compare Options #1, the Bar Graphs are particularly informative.) Click to view the reports for Compare Options #1 (8 Pages) Click to view backup reports for Strategy 1 -- Annuity in Estate (19 Pages) Click to view backup reports for Strategy 2 -- Annuity to Charity (21 Pages) In conjunction with the bequest of the annuity at death to charity, Paul and Sarah are also reviewing the acquisition of $1.2 million of second-to-die coverage ($12,000 annual premium) in a Wealth Replacement Trust ("WRT") in order to offset the net loss of the annuity to their heirs (Strategy 3). This analysis can be seen in the second Comparison section -- Compare Options #2 -- which compares Strategy 3 with Strategy 1. (Although it produces a small dent in the parents' long-range net worth, there is an increase in wealth transferred to heirs in all years.) (In Compare Options #2, the Bar Graphs are particularly informative.) Click to view the reports for Compare Options #2 (8 Pages) Click to view backup reports for Strategy 3 -- Annuity to Charity plus WRT (23 Pages) The size of the policy in the WRT follows no fixed rules. (In Scenario 3, it was designed to match the heirs ultimate net inheritance from the annuity.) Strategy 4 introduces $2.5 million of second-to-die coverage ($25,000 annual premium) in the WRT which dents the parents' net worth a little more, but significantly improves the wealth to heirs. This analysis can also be reviewed in the third (and last) Comparison section -- Compare Options #3 -- which compares Strategy 4 with Strategy 1. (In Compare Options #3, the Bar Graphs are particularly informative.)
Click to view the reports for Compare Options #3 (8 Pages) Click to view backup reports for Strategy 4 -- Annuity to Charity plus WRT++ (23 Pages) Strategies 2, 3, and 4 all produce a long-range gift to charity in excess of $5 million. If this money is paid to a family foundation or a donor-advised account, it still is in the general control of the family. John Rutledge (a Merchant Banker based in Greenwich, CT) has a famous quote that applies to the magic of this transaction: "The control of wealth is the virtual equivalent of ownership of wealth." Viewed in this context, gifting annuity assets to charity at death can produce a significant increase in family-sponsored wealth. The overall strategy is a good examples of "heads you win, tails you win; what do you have to lose?" Note to Wealthy and Wise users (version 6.0 and higher): We produced the charitable bequest of the annuity by checking the Charitable Bequests box (100%) under the Tax Deferred Assets tab. Note: The "stretch-out" alternative IRA in which the next generation of family members can continue to defer the income tax on undistributed IRA assets is unavailable for deferred annuities. This means the charitable bequest of an annuity has virtually no planning competition -- other than not utilizing it thereby providing a tax windfall for the IRS. Note: Some companies have begun issuing deferred annuities with enhanced death benefits in order to help produce the funds for the taxes due at death. Other than for uninsurable annuitants, this appears to have more marketing sizzle than sound economics. First, it costs 15 to 30 basis points in yield which, long range, is a very high price to pay for the benefit provided as it is usually limited to a maximum amount in the very low six figures (which, in Paul and Sarah's case, would make it of negligible long-range value). Second, the benefit usually ceases at age 80 or so, well short of many an annuity owner's life expectancy. (This is particularly the case with Paul and Sarah whose joint life expectancy extends almost 29 years.) Third, even with the feature present, it would still be prudent to use the charitable bequest of an annuity strategy as it would amplify the gift to charity somewhat during the years that the feature is present. Note: InsMark has a Computer Business Card (PowerPoint screen show) named "Charitable Bequests of Annuity Assets" that is available to Wealthy and Wise licensees. For more information, e-mail us at marketing@insmark.com or call an InsMark Account Executive at 1-888-InsMark (467-6275). Wealthy and Wise users can download the Workbook for all the illustrations and graphics in this report by clicking here. Main | Features | Sample Cases & Output | Sample Input Screens | Testimonials | Order Wealthy and Wise |
