Advisor Today - July/August 2015 - (Page 38)
By Laurence Greenberg
Estate Planning and Annuities?
Here is how variable annuities may enhance your client's estate plan.
ithout an estate plan,
your clients' heirs may be
subjected to unplanned
hazards, such as probate, creditors,
lawsuits, judgments and legal fees,
which can compromise the value
of an estate you and your clients
worked hard to create.
Estate planning is complex and
should always be evaluated carefully
on a case-by-case basis. To ensure
a lasting legacy, advisors and their
clients may benefit from consulting
with an estate-planning or a taxplanning expert. This is especially
true for high-net-worth clients.
While estate planning will
likely involve the use of several
investment vehicles, many advisors
and clients have not considered
using variable annuities (VAs),
possibly because of their high assetbased insurance fees and a limited
selection of investment options,
complex structure, surrender fees
and steep commissions.
But simple, transparent,
no-commission products that cut
costs and offer more investment
options can work well and may add
tremendous value to your client's
estate. Whether your client wants
to accumulate more, avoid probate,
reduce the size of his taxable
estate or control the income and
deferred asset growth inside a
Credit Shelter Trust or Charitable
Remainder Trust, a VA may help
him accomplish these goals.
Note that VAs are not the only
estate-planning tools, and in some
cases, life insurance may be more
effective in transferring wealth.
Asset accumulation is a big issue,
even for successful professionals
and high-wage earners. Longer
lifespans mean that they could face
38 ADVISOR TODAY | July/August 2015
To maximize long-term accumulation, few things beat the
power of tax deferral.
a long retirement. And shifting
family dynamics are leaving clients
to care for aging parents while
funding their children's college
education and possibly raising a
second family of younger children
with a new spouse.
Faced with these challenges,
clients must understand this
point: The more they accumulate,
the more they can leave to their
estate. And to maximize long-term
accumulation, experts agree that
few things beat the power of tax
deferral. When clients stockpile
investments for years or decades-
compounding growth without
stripping away 15 percent to 35
percent in taxes each year during
the accumulation period-they can
Likewise, for tax-inefficient
assets, including bond funds,
REITs, alternative investments and
actively managed investments-
currently taxed at ordinary income
rates as high as 35 percent-
tax deferral delivers a powerful
advantage. New research shows
that tax deferral can potentially
increase returns by as much as
100 bps-without any subsequent
increase in risk-simply by
locating assets based on their tax
treatment between taxable and
tax-deferred vehicles.1, 2
plans and IRAs are maxed out,
VAs are powerful alternatives for
long-term tax-deferred investing.
Earnings inside the annuity grow
tax-deferred, and the account isn't
subject to annual contribution
limits like other tax-deferred
qualified investment vehicles,
making them a great fit for your
Taking on taxes
When it comes to estate planning,
many advisors and investors will
question the tax treatment of VAs.
When gains on VAs are withdrawn,
they are taxed at ordinary income
tax rates, as opposed to the lower,
long-term capital-gains tax rate
typically paid on other investments
such as equities and mutual funds.
However, the benefit of taxdeferred compounding over years
or decades can help to alleviate
this-especially when a low-cost
VA is used.
Likewise, many advisors and
investors may be concerned that
in addition to federal estate tax,
beneficiaries will be subject to
tax on Income in Respect of a
Decedent (IRD) if a VA is included
in an estate. Still, there are several
reasons why an annuity may prove
beneficial to your client.
First, when working with a
nonqualified VA that is funded
with after-tax dollars, the portion
of the annuity referred to as the
"cost basis" is excluded from IRD.
Because this cost basis portion of
a nonqualified annuity, which is
the sum of the total contributions
to the VA, has already been
subject to income tax before it was
contributed, it will not be subject to
income taxes a second time.
The cost basis does not create
IRD upon the owner's death. Only
the gains in excess of the cost basis
at the time of the owner's death will
Table of Contents for the Digital Edition of Advisor Today - July/August 2015
From The Editor
How Do You Create the Million-Dollar-Plus Practice?
Traits of Top Performers
The Business Benefits of a Pipeline Mentality
What Does It Mean to Act Ethically?
Variable Universal Life is Back
Sell More LTCI By Selling Less!
Overcoming the Most Common DI Objections
Mitigating Retirement Risks with Life Insurance
Creating Irreplaceable Capital
Closing the Gap
Financial Future Less than Rosy for Boomers and GenX
Estate Planning and Annuities?
Ignite Your Sales Potential
A Closer Look at BTID
Upholding the Tradition
NAIFA’s Candidates for Election
Addicted to Rejection
What is Keeping Your Senior Clients Up At Night?
Advisor Today - July/August 2015