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


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.

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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

The Legacy Strategy that Passes Greater Values


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.

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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.

Wealth Transfer Annuities Family Values Legacy Planning

How to Reduce or Eliminate Taxes on Wealth Transfer


When estate planners talk about annuities and IRAs, they say those vehicles are the worst to be holding when you pass away. I generally agree with the statement. Moreover, planners focus on the estate tax and reducing the impact of it. The deferred gains in a tax-deferred product – qualified or non-qualified – has the tendency to force the gain to be taxed at the recipient’s highest marginal tax bracket.


Because those assets become taxed at the highest marginal bracket, it’s important to have plans for the tax deferral or qualified accounts in a client’s estate. Many planners should look to life insurance as a way to create the necessary capital to pay for the tax. Life insurance also provides the liquidity needed in order to pay the tax without invading the IRA.   


Other planners look to leverage the power of the stretch IRA to minimize taxes and reduce the burden of the overall tax on the beneficiaries. Unfortunately, it appears that Congress is making plans to limit the amount that can be stretched to $250,000. For the mass affluent and middle-America clientele, the loss of the stretch provision might be devastating to wealth transfer. 


One Product, Two Tax Strategies

So, how can life insurance work in conjunction with IRAs and tax-deferred vehicles like non-qualified annuities? 


  • Life insurance can be used to pay for the income tax on the transfer of wealth. Income tax brackets remain extremely high – as high as 39.6 percent on a federal rate. That doesn’t even take into consideration the state tax revenue. That can push it well over 40 percent of the gain being taxed. As I travel around the country, I don’t hear enough people talking about the income tax effect on wealth transfer. Clients and planners hide behind the exemption of the federal or state estate taxes. Unfortunately, those do not apply to income taxes. Creating liquidity to meet the demands of the income tax due the April after the death of the IRA is a smart option. Life insurance pays for the cost of the tax on discounted dollars, and it generates the cash position when people need it most. 


  • Qualified assets above those that can be stretched can be transferred to life insurance. This allows the client to turn the transfer of wealth from tax-deferred to tax-free. This can be meaningful to beneficiaries and easier to transfer outside of the estate with proper use of trusts.  


Look at your tax-deferred vehicles and identify clients who will pass along not only a big inheritance, but also a big tax bill. Talk to them about using life insurance to reduce overall costs or completely eliminate the federal income tax on the transfers of wealth. 


Winning Strategy

Life insurance can be meaningful for those with larger IRAs or accounts with tax-deferred gains. These vehicles are the worst to have in your estate on the date of death. There are strategies to eliminate or reduce the income tax.  


About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Tax Efficient Wealth Transfer Estate Taxes Life Insurance Annuities