Annuity Tax Bomb Saving Idea for Legacy
An Advisor called to discuss options for an annuity owned by the mother of one of his best clients. Mother was age 84 diagnosed with dementia and the family was considering moving her to an Alzheimer’s care facility. Mom was described as very healthy otherwise. Her Daughter and son-in-law were her only close family and both Mother and Daughter (beneficiary) didn’t need income from the annuity now or later – this was a true legacy asset.
The Annuity was a Variable Annuity purchased by mom 12 years earlier and original deposit was $200,000. (Note: VA may not have been suitable at the time of purchase, but that is water under the bridge now) The base fees on the VA were almost 2.0% and she had an income rider and guaranteed death benefit rider for another 90 basis point cost. In short, the total fees including the sub accounts were close to 4% and with this fee drag, she had averaged only about 2.4% over the 12 years.
Current Annuity Value was $259,000 & Death Benefit was $259,000
Income Value account was only $190,000 and had a special 10% income option (LIFO)
Mom was in a net 15% tax bracket and Daughter (beneficiary) was in a 35% tax bracket.
After analysis, we set on a plan to annuitize the annuity for Mom with a 10 year period certain. This would spread the tax due over those 10 years and would be paid at Mom’s rate until death. Hopefully Mom will be around for most or all of those 10 years. Since Mom didn’t need the income, an investment account would be set up to dollar cost average the income payments at an assumed net yield of 5%.
Expected Results after 10 years.
Current tract: In 10 years, Variable Annuity would have been worth about $330,000 and $130,000 would be taxable to the daughter at her higher tax rate and paid out subject to IRS rules.
Recommendation: Annuitize and create Investment account to accept funds over time. In 10 years, Investment Account should be worth about $340,000 with no tax due.
The SPIA created $2,150 of monthly payments for 10 years – net after mom’s tax rate applied to taxable portion of payments.
Clients loved the analysis performed by their Advisor. In speaking with the daughter (his client), she would much rather receive an investment account from mom worth about $340,000 after tax rather than $330,000 tax deferred account with tax due on $130,0000.
Note: Ancillary Benefit – The Advisor received a 3% commission on the Immediate Annuity ($7,700) and control of the Mothers account.
Hopefully you are thinking of clients where you can add real additional significance and value to their family with protection and legacy strategies.
Call for your personalized case designs today. We are here at your service.