Advisor Today - July/August 2015 - (Page 38)

FINANCIAL PLANNING FINANCIAL PLANNING By Laurence Greenberg Estate Planning and Annuities? Here is how variable annuities may enhance your client's estate plan. W 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. Maximizing accumulation 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 save more. 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 Once employer-sponsored 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 high-net-worth clients. 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
New Products
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
Divorce DI
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?
Advertiser Index
Back Page

Advisor Today - July/August 2015