Annuities

Two Birds, One Stone: A Strategy to Retain Assets and Find New Clients


Annuities

The Tax Cut and Jobs Act made great strides in transferring wealth by increasing the federal estate tax exemption to $11.2 million per person. The problem is many Americans no longer feel the need to complete estate planning. That’s incorrect thinking.

 

One of the costliest taxes at death is the income tax on the transfer of nonqualified annuities. This will likely come as a surprise to many beneficiaries as most planners have not addressed the issue. You can address it by giving your clients and their beneficiaries more control.

 

One Rider, Several Advantages

One of the more innovative income riders has received a private letter ruling that provides great tax benefits. The income that is generated to the current owner/annuitant receives an exclusion ratio. All other income riders are taxed as last in, first out (LIFO).

 

This tax advantage allows the client to be more intentional about the source of retirement income. The use of an exclusion ratio might boost net after-tax income to the client while taking pressure off the assets under management to perform. For clients using taxable certificate of deposit interest as income, this maneuver can make a significant increase in gross and net income.

 

More importantly, the rider allows the beneficiary control over how they receive the transfer at the death of the owner/annuitant. The beneficiary can “harvest” the cost basis in the nonqualified contract through a lump-sum distribution or by continuing the monthly income. I like to think of this strategy as putting the tax man at the back of the line instead in the front of the line.

 

This strategy creates several advantages:

  • You’ve increased the overall income to the client with the income rider
  • The client enjoys more of the income since more of the income is received tax free in the form of a return of cost basis
  • The beneficiary has choice and control of when to get taxed on the remaining gain in the annuity

 

If you provide that level of value to your clients and their beneficiaries, you are in a great position to retain those funds through the next generation. That’s the best way to retain assets and attract new clients.

 

Winning Strategy

Think about getting your clients in a better position to harvest the cost basis on their nonqualified annuities during the transfer process. It can help the client now and the beneficiary later.

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

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About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Wealth Transfer

How to Double Your Clients and Double Your Business


Annuities

Everyone always asks my sales team if we support marketing initiatives like seminars, client events and mailing lists. We do in certain situations, but I’ve found those tactics to have limited upside and they are costly, even with sponsorship. 

 

To be honest, I think there’s a more effective way to grow your business – by capturing the next generation of your current clients. 

 

According to LIMRA, there are more than $489 billion of in-force annuity assets on the books of insurance carriers. These policies are not being annuitized for income and largely not being used for income rider usage. Many have accumulated for years and contain built-up gains that will be taxed at the beneficiary’s ordinary tax rate. We call that the ticking tax bomb. 

 

Defuse the Situation

You could wait for the IRS to strike as soon as your client is gone. Or you could take action to help their beneficiaries before it’s too late. 

 

One solution is to turn on tax-advantaged income for your clients who own these “untapped” annuities. The income stream is small and includes a return of basis, making part of their payment tax-free. When your client dies, the remaining cost basis may be stripped from the annuity in a lump sum or through payments. This allows their beneficiaries immediate access to tax-free cash. 

 

The remaining inheritance can be stretched over a beneficiary’s lifetime, which reduces the affect of taxation. Otherwise, a beneficiary would have to claim 100 percent of the remaining gain in the year of receipt or over five years from the date of the annuitant’s death. 

 

By putting the IRS in the back of the line, you will gain trust with your next generation of clients. This is a great way to grow your business. I encourage you to not only conduct regular reviews of your clients’ beneficiary designations, but also look at planning for the beneficiary’s inheritance. How they receive the money is equally important as the dollar amount. 

 

Winning Strategy

Double your business by doubling your clients through annuity reviews. If you look at how the distribution will affect the beneficiary and add value to their distribution, you will gain their trust and earn their business.

Retirement Webinar

Craving More?

We recently sat down with a few of our top Retirement Income Consultants to gather their perspective from the field. Watch how they helped their territory grow with tools and resources from Ash.

Watch the Replay

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Planning Annuities In-Force Review Tax Planning Generational Planning

The Legacy Strategy that Passes Greater Values


Annuities

Many times, your clients will say they wish to leave a legacy or inheritance to their children or grandchildren. Usually, they think of this as a lump sum of cash or certain personal items. But what about a steady income? You could help them create a longer, and potentially more fulfilling legacy with a joint income annuity.

 

We’ve had successful results with this concept. Usually, clients want to leave a certain amount of money to their beneficiaries. However, before they pass and give away their remaining assets, they’re going to need a certain amount of income. This strategy solves both challenges.

 

In this situation, the older client elects to purchase a single-premium immediate annuity and make a child or grandchild a joint annuitant. There are a few advantages to purchasing an annuity in this manner:

 

  1. The older client enjoys an income guaranteed for life
  2. Income is received with an exclusion ratio, so most of the income is received tax-free
  3. When the older client passes away, the joint annuitant continues to receive the income for the rest of their life
  4. If a cost-of-living rider is attached, the joint annuitant enjoys potentially guaranteed step-ups in income for the rest of their life

 

Greater Values

This is already a unique strategy to legacy planning, but I encourage clients to take this one step further. I ask them to write letters to their child or grandchild, passing along memories, advice and family values. Along with the funds from the annuity, these letters can be sent at certain life milestones:

  • 16th birthday
  • High school graduation
  • Wedding day
  • Birth of first child 

In these letters, the parent or grandparent can share their wisdom – struggles as a teen, joy in marriage, the challenges of raising a family, etc. These letters are what will make a difference to beneficiaries. The transaction is more than an economic benefit. It becomes an inheritance of a legacy.

 

Winning Strategy

When it comes to wealth transfer, we tend to think about life insurance or beneficiary designations. Think outside the box to transfer wealth that includes value – family values.

Retirement Webinar

Craving More?

We recently sat down with a few of our top Retirement Income Consultants to gather their perspective from the field. Watch how they helped their territory grow with tools and resources from Ash.

Watch the Replay

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,”  on Amazon.

Wealth Transfer Annuities Family Values Legacy Planning

Guaranteed Income and Success


Annuities

Over the past four and a half years, my firm has been working on a software tool to help Americans think and act differently in preparation for retirement. JourneyGuide  helps identify how a client will meet their spending needs on an after-tax, after-inflation basis. It’s fast, accurate, and it allows you to work with your client not just for your client. 

 

Important findings have been coming out of the software for some time. I find the most important aspect revolves around guaranteed income and the positive effects it has on the portfolio. 

 

Earlier this year, we released a study on Qualified Longevity Annuity Contracts (QLACs) which proves they improve the probability of success in retirement portfolios.1 After a QLAC was added, many of the scenarios we tested increased to more than 90 percent probability of having $1 in the portfolio at age 95. What surprised me the most was that the largest improvements were for younger ages (ages 55-60) and more conservative clients. We often think of the traditional income annuity buyer as being 65-plus. This study clearly shows that placing an annuity with younger ages is beneficial. 

 

Any Guaranteed Income is Good

However, it’s not just deferred (QLAC) or immediate income annuities that improve outcomes. The power of guaranteed income is demonstrated case after case. The ability to provide income that the client will always receive is a powerful story. Purchasing the income and allowing the rest of the portfolio to generate less accomplishes two things:

  • It takes pressure of the portfolio to sustain a high withdrawal strategy 
  • It allows the portfolio to be invested with a long-term focus instead of short-term gains for income

 

These findings work regardless of income now or income later. The ability to take pressure off the portfolio allows the client to invest longer term, which might provide additional tax relief in the form of long-term capital gains versus ordinary income. Guaranteed income can be found in Social Security, defined benefit income payments or commercially purchased annuities. Those are the only vehicles that support mortality credits and provide income for as long as the client lives. 

 

Winning Strategy

Go to www.journeyguideplanning.com and request your free demonstration of JourneyGuide. I think you will find the tool can change how your clients think and act in retirement. 

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

 

1Ash Brokerage, “QLACS Improve Probability of Retirement Success,” 2018: https://goo.gl/Vw9Htz

QLAC Qualified Longevity Annuity Contracts Guaranteed Income Retirement Planning Annuities

Why Fee-Only Isn’t Always the Best Interest


Annuities

Recently, several industry publications have looked at the distribution of fee-based products. These are annuity products with no commission. In theory, the design allows a fee-only planner to place products while adhering to their business model, charging an advisory fee for all assets under management. I caution advisors – and consumers alike – to be weary of the false promises around fee-only product development. 

 

While I remain a huge proponent of consumer value, the distribution of these products remains in its infancy, with many faults in the initial distribution strategies. Recently, we have seen firms that offer a subscription-like service for those fee-only planners. The pricing is based on the planner’s assets under management and provides access to a suite of annuities with no commission earned on the amount purchased. 

 

Two things are most concerning:

  • The structure. What’s not fully disclosed or understood is how much money the subscription firms are receiving from the carriers in order to have the products on their platform. Like any distributor, the firms focusing on those fee-only advisors earn an allowance based on the amount of the annuity purchased … similar to a commission. So these firms earn revenue twice – by charging the planners and taking a portion of the sales from the carriers. 

 

  • The impact on the end-client. The net client value is suspect, at best. We ran a quote for a fee-only product and compared it to a commissioned-based product. On a $100,000 single-premium immediate annuity for a 65-year-old male with a life-only payout, the increase in income was $21 per month. On a $500 monthly income that is a sizable increase, to be clear. However, net of the 1 percent fee that the advisor will charge, the client loses $748 annually.

 

Don’t misunderstand me. I think the value of guaranteed income is extremely important. However, clients must be aware that the net benefit must be an increase in their net income above fees and expenses. In many cases, it seems to be in the best interest of the client to take the annuity purchased out of a fee-only or assets-under-management model and purchase a fully commissionable product. The net growth in income would be higher versus sticking to a rigid, fee-only business model. 

 

Winning Strategy

Look at the value of both fee-based and commission-based product selections. Don’t be locked into your business model so much that it hurts your client. 

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Fee-Only Annuities Retirement Planning