Advanced Annuity Sales Ideas

Transcription

1 Advanced Annuity Sales Ideas Thomas H. Duncan, JD, CLU, ChFC Senior Director, Advanced Consulting Group Nationwide Financial Below are 25 sales ideas using Nationwide s deferred and immediate annuities. These ideas cover the use of annuities in retirement income planning, legacy planning and/or charitable planning. The hope is that this brief synopsis will give financial advisors an introduction to the broad uses of annuities in many different planning scenarios. 1) Variable Annuity (VA) in an IRA: Legacy Planning and Market Protection Spousal Protection Feature (SPF) adds additional death benefit protection covering both the IRA owner and their spouse Contract value stepped-up to death benefit value on death of both IRA owner and their spouse Gain liquidity because any remaining surrender charges are waived after processing of the death benefit Both spouses must be co-annuitants and primary beneficiaries Only an annuitant-driven company can offer this death benefit feature on an IRA annuity Owner-driven annuity products may offer features similar to SPF on nonqualified deferred annuities by naming both spouses as joint owners; but, with IRA annuities joint ownership is not permitted, so only an annuitant driven company can offer death benefit protection on both spouses on an IRA because payment of a death benefit is triggered upon the death of both co-annuitants. Target Audience: Married clients naming a spouse as a primary beneficiary on IRA assets 2) Variable Annuity in an IRA: Income Planning Lifetime income guarantee with potential for income growth Facilitates transition of accumulation products into retirement income products View an IRA VA with a living benefit as a separate asset class when determining asset allocation; or, Consider a IRA VA with a living benefit as a possible bond/fixed income replacement, especially in low interest rate environments Target Audience: Clients 5-10 years away from retirement who will use the IRA assets for retirement income 1

2 3) Variable Annuity in a Qualified Plan: Income Planning Plan purchases a VA with an income benefit Small qualified plans 1 to 2 participants, where annuity is the individual account balance vehicle - Profit Sharing - 401(k)/Solo 401(k) Investment pool qualified plans where annuity is an investment in the plans investment pool - Defined Benefit - Profit Sharing Designed for in-kind IRA rollover of annuity at retirement Growth now (cash value and benefit base) for income later Also works for SEP and SIMPLE IRA plans Target Audience: Small business owners, sole practitioner doctors, lawyers and sales consultants who are interested in converting accumulation assets into income assets 4) Three-bucket product allocation approach for IRA assets Buckets: 1. Income Now bucket in an immediate annuity 2. Income Later bucket in a VA with a living benefit 3. Required Minimum Distribution (RMD) bucket in a money market IRA Account Rule: IRA immediate annuity payments may not be used to satisfy the RMDs for other (non-annuitized) IRAs Best Practice: Create a third IRA bucket to pay RMDs and allow bucket 2 s VA with a living benefit time to accumulate income benefit step-ups before a withdrawal is taken Target Audience: Investors who want a source of retirement income they cannot outlive and the potential for that income to increase over time 5) Life Insurance Covered Roth Conversion: Creating tax-free income for life Client purchases a VA with a joint life income benefit using Traditional IRA assets, the joint life option means the same level of income is guaranteed until the 2 nd spouse passes away IRA owner purchases a life insurance policy on their own life and names spouse as beneficiary At IRA owner s death, surviving spouse re-registers the IRA into their own name and collects the death benefit proceeds from the life policy 2

3 Surviving spouse could convert the entire IRA to a Roth IRA and use the life insurance proceeds to pay taxes on the Roth conversion; but the annuity product stays the same The newly converted Roth IRA variable annuity with the living benefit rider can provide potentially tax-free guaranteed lifetime income Target Audience: Clients expressing concerns about the future of where tax rates are headed. IRA owner would need to be healthy enough to qualify for life insurance 6) Spousal Inherited IRA Bucket Approach: Income for a Younger Surviving Spouse Surviving spouse under age 59 ½ inherits deceased spouse s 401(k) Surviving spouse needs income from these funds now and throughout retirement Distributions from inherited IRAs are not subject to the 10% tax penalty for premature distributions Bucket 1 for Income Now: The surviving spouse purchases an immediate annuity titled as a spousal inherited IRA Bucket 2 for Income Later: The surviving spouse purchases a VA with a living benefit titled as the surviving spouse s own IRA to provide income after surviving spouse turns 59 ½ Bucket 3 for Emergency Needs: Also consider a liquidity bucket in a cash-equivalent account titled as a spousal inherited IRA for emergency income needs Target Audience: Married couples with a large age disparity between each other or a client younger than 59 ½ who has recently passed 7) Stretching an Annuity Death Benefit: Extended IRA and Extended Nonqualified Annuity Concepts An IRA annuity or nonqualified annuity with death benefit protection protects the beneficiaries if the annuitant s death occurs in a down market The extended concept allows the beneficiary of an IRA or nonqualified annuity to only take a minimum life expectancy based withdrawal every year to satisfy the yearly withdrawal requirement and leaves the remainder of the assets to potentially grow in the tax-deferred inherited IRA or beneficial nonqualified account Stretching has the potential to save on taxes paid on distributions from the inherited accounts by potentially keeping the beneficiary in a lower marginal tax bracket in any one year as opposed to taking the entire distribution at once and possibly moving into a higher tax bracket in the year of distribution Stretching may allow the beneficiary to reap a greater reward from their inheritance because of the power of tax-deferred compound growth as opposed to taking a lumpsum payout at the owner s death Using Nationwide s beneficiary restriction form, contract owners can direct ahead of time that a non-spouse beneficiary be required to take a stretch payout and not take their inheritance as a lump-sum 3

4 Target Audience: (1) Owners of IRA and nonqualified annuities who want to protect what they leave behind to their heirs. (2) Owners of IRA and nonqualified annuities who want to restrict how their non-spouse beneficiaries take the proceeds from these accounts 8) Inherited IRA/Beneficial Nonqualified Annuity with Death Benefit Protection Transfer inherited IRAs or exchange beneficial nonqualified annuities to Nationwide and get death benefit protection on the beneficial owner as annuitant Spousal Protection Feature is available, further protecting the inheritance from market fluctuations if the beneficial owner is married and either spouse were to pass away in a down market Successor beneficiary finishes the extended payment stream at a potentially steppedup death benefit value Qualified plans are now required to permit non-spousal beneficiaries to rollover plan balances to inherited IRAs Income benefit riders are typically are not available on inherited IRAs or beneficial nonqualified contracts Target Audience: Beneficiaries seeking to minimize the yearly tax hit of the required beneficial distributions and who want to have protection of the assets for their own successor beneficiaries 9) Partial 1035 Exchanges: Deferred Annuity to Deferred Annuity Faster access to cost basis through annuity splitting Hold period to get separate cost basis treatment is 180 days (Rev. Proc ) If hold period violated, meaning a withdrawal is taken from either the source contract or new contract within 180 days of the partial exchange, then the contracts may be aggregated together for taxation purposes Target Audience: Owners of nonqualified deferred annuities that express a future income need from contracts with large amounts of tax-deferred gains 10) Partial Exchanges: Deferred Annuity to Immediate Annuity New opportunity created by Rev. Proc No longer a choice between all or nothing annuitization If the first payment from the immediate annuity, funded by a partial exchange from a deferred annuity, is received within 180 days of the partial exchange, then any lifebased payout option or term certain only payout option of 10 years or greater avoids aggregation If the above rules are followed, then exclusion ratio treatment may be used Allows the immediate annuity to create an income stream while the remaining amount in the deferred annuity serves as a liquidity bucket 4

5 Permits an annuity owner to dial-in a known payment need for wealth transfer, baseline income or gifting from a deferred annuity they already own Using an immediate annuity with exclusion ratio treatment on the payments permits a potentially more tax-efficient draw down of a deferred annuity with gains than would a systematic withdrawal out of the deferred annuity, as withdrawals from deferred annuities come first from gains Target Audience: Owners of nonqualified deferred annuities that express a future income or wealth transfer need from contracts with large amounts of tax-deferred gains 11) Immediate Annuity Ideas: Charitable Gift Annuity (CGA) Re-insurance CGA advantages for donor: The donor is permitted to give away highly appreciated property without having to pay taxes currently; instead they pay taxes over time as each payment from the CGA is received An income stream can be created that the donor cannot outlive A current income tax deduction is generated for the donor CGA risks for charity: Longevity Risk - donors may outlive their life expectancies Investment Risk - invested assets may not return as much as needed to fund the income stream Why use an immediate annuity for CGA re-insurance? Charity transfer risks - through actuarial calculations, the annuity company accepts and bears the investment and longevity risks not the charity Charity creates free cash - the difference between the fair market value of the property and the purchase price of the immediate annuity is potentially available to the charity to use for its ongoing operations Target Audience: Charitable organizations and/or donors looking for ways to provide cash flow certainty for a charitable gift annuity promise 12) Immediate Annuity Ideas: Social Security Maximization Consider delaying Social Security until age 70 for high earning spouse Often beneficial to delay taking Social Security where longevity is expected or when one spouse is many years younger than the other Delaying can result in as much as a 8% per year increase in income if recipients wait to take Social Security at age 70 versus taking at age 62 Replace income that could have been taken from age 62 to age 70 with a term certain immediate annuity Purchase the annuity by solving for a monthly payment equivalent to Social Security payout at age 70 Lower earning spouse claims early benefits when they reach 62 5

6 Target Audience: Early retirees, especially those with a significantly younger spouse, where the couple is expressing concern about cash flow after the older spouse passes away 13) Immediate Annuity Ideas: Gifting Use an immediate annuity to create a cash flow for gifting Typical contract structure: Mom is owner Daughter is annuitant Daughter is payee Beneficiary is granddaughter Daughter (payee) receives the payments Mom (owner) receives the income tax reporting Mom (owner) gets to use exclusion ratio treatment on the payments Gifts completed when daughter (payee) receives payments, not when mom (owner) purchased immediate annuity Annual gifting exclusion amount and/or lifetime gifting exemption can be used to avoid gift tax Mom doesn t have to get involved with paper flow of payments Daughter (annuitant) takes over ownership if mom (owner) dies At the death of the daughter (annuitant) and if there is a residuary amount under a term certain or cash refund payout option still available then the granddaughter (beneficiary) may either: - Continue payments at current level; or, - Take a commuted amount If the daughter (annuitant) dies before mom this would then be a gift of any residuary amount from grandmother (owner) to granddaughter (beneficiary), because grandmother (owner) is still alive when the wealth (residuary amount) is made available to granddaughter (beneficiary) Common uses of the idea are for lifetime gifting, education funding, and car payments, etc. Target Audience: Clients seeking to provide financial assistance to family for a specific purpose or in a specific amount over time 14) Immediate Annuity Ideas: Corporate Owned Use an immediate annuity to create a cash flow for corporate payment obligations Typical contract structure: Corporation is owner Employee is annuitant Corporation is payee Corporation is beneficiary Corporation receives payment Corporation receives tax reporting 6

7 Corporation pays tax on interest component of immediate annuity payments Corporation makes payment to employee Corporation receives tax deduction for payment to employee Employee includes entire payment in their taxable income Target Audience: Business owners who may want to simplify payments under a nonqualified deferred compensation plan or buyouts 15) Annuity in a Credit Shelter Trust: Death Benefit Protection on Surviving Spouse Trust owned VA with death benefit protection on surviving spouse s life (surviving spouse is annuitant) Benefits Protection against down markets for beneficiaries Lessen trust income taxation by keeping any investment growth tax-deferred Income suppression from trust because annuity gain is not considered trust income and thus doesn t have to be distributed to surviving spouse Grow the assets by not having to distribute gains annually Drawback Annuity s additional product fees could hinder returns of trust investments Target Audience: Clients with an existing Credit Shelter/Bypass/B Trust who may be interested in exploring options to build trust assets for trust beneficiaries 16) Annuity in Irrevocable Trust: In-Kind Distribution to Remainder Beneficiaries Trust-owned VA with income benefit on children s lives Trust remainder beneficiaries (usually adult children) are the annuitants Separate annuity purchased for the benefit of each child/remainder beneficiary Distribute the annuity to the children upon a triggering event in the trusts provisions like the death of surviving spouse After policy distribution to beneficiaries, income benefit may be turned on by beneficiary (who has become the new owner) at a date best optimizing product payout rates and income needs Benefits Tax deferral Leave guaranteed retirement income asset to children Integrated strategy estate planning and income tax management Drawbacks Potential 10% penalty tax on early withdrawals Ordinary income taxation on eventual withdrawals Legal and tax advisor input and sign-off is crucial to strategy since the Private Letter Ruling (PLR) that permitted this strategy is not binding authority except for the parties involved. 7

8 Target Audience: Trusts with assets that are primarily for the future retirement income needs of the remainder beneficiaries 17) Annuity in a Revocable Trust: Trust as Beneficiary Revocable trust provides: Unique distribution methods and certainty for annuity proceeds after death Control and consolidation while grantor is alive Privacy when grantor dies Control when grantor dies Only nonqualified annuities may be owned by revocable trusts Annuity Provides Death benefit protection when grantor dies to protect beneficiaries from market downturns Tax deferred growth while owner is alive Drawback When a trust is named as the beneficiary of a nonqualified annuity the annuity must be distributed within five years, There is no ability to re-register a nonqualified deferred annuity left to a trust in a surviving spouses name There is no ability to stretch a nonqualified deferred annuity left to a trust Target Audience: Individuals who have assets in a revocable trust who are looking for market participation with protection 18) Annuity in a Revocable Trust: Spouse as Beneficiary Spouse is annuity beneficiary - not trust Allows Spousal Protection (SPF) death benefit feature and/or income benefit joint life features to be used Contract Structure: Owner = John Doe Revocable Trust Annuitant = John Doe Co-Annuitant = Mary Doe (John s Wife) Primary Beneficiary = Mary Doe Primary Beneficiary = John Doe Contingent Beneficiary = John Doe Trust Benefits Potential for death benefits on both spouses with SPF Spousal re-registration privilege from tax code prolongs tax deferral Drawback - If John passes away before Jane, John loses the control at his death that naming the trust as beneficiary of annuity would have provided 8

9 Target Audience: Often times, trusts are created to accommodate special circumstances or have very specific payout instructions. This idea may not be for those circumstances. Ideal clients here may simply be trying to bypass probate with the revocable trusts and are leaving all their assets to their surviving spouse 19) Annuity in Irrevocable Trust: Funded by Lifetime Gift to Reduce the Estate Trust owned annuity for death benefit protection Cash given to trust, then annuity purchased Spouse that is likely to live the longest is named as annuitant Annuity death benefit proceeds given to kids through trust Benefits Remove asset appreciation from taxable estate Tax deferral Integrated with estate plan and distribution wishes Drawbacks Client loses access to the gifted capital and potential appreciation Target Audience: Clients utilizing estate planning techniques to provide for heirs and remove assets from their taxable estate. Typically, these clients have assets above current estate tax exemption levels 20) Annuity in Charitable Trusts: VA with an income benefit in a CRAT Charitable Remainder Annuity Trusts (CRAT) provide a fixed amount of income annually to donor with the remainder going to charity Income benefit guarantees provide a fixed dollar payment (if no excess withdrawals) that can last for the length of the life of the annuitant VA with an income benefit as investment in a CRAT provides: A fixed dollar amount with the potential to grow Death benefit increases likelihood that trust will have money to leave behind A reduction of the risk of the CRAT running out of money/cashflow Target Audience: Clients that may already have a CRAT established and funded, but are seeking ways to provide a guaranteed cash flow while potentially increasing the likelihood of leaving trust assets to a charity 21) Annuity in Charitable Trusts: VA in a NIMCRUT for Death Benefit and Income Suppression NIMCRUT (Net Interest Make-Up Charitable Remainder Unitrust) Trust distributes any earnings and can distribute excess earnings if there were no distributions in prior years NIMCRUT creators usually want to delay taking income initially but want up-front income tax deduction that gifts to CRTs provide Variable annuity can be a way to suppress income from the CRT 9

10 Annuity build-up is not considered income, so it doesn t have to be distributed Death benefit protection for the charity or other income beneficiary Living benefits are not a good match with NIMCRUTS Unitrust (percentage based) payout means that lifetime guarantee would likely never be utilized because the trust payout is based on the percentage of the value of the trusts assets, like the annuity s cash value, not the income benefit base of the annuity rider Target Audience: Clients that may already have a NIMCRUT established, but who are trying to maximize a payout during a turbulent market environment to the charitable beneficiary 22) Claiming a loss in a Nonqualified Annuity and using proceeds to purchase Life Insurance Life insurance purchased from annuity s cash surrender value may provide more death benefit than what the annuity would have provided The death benefit on life insurance is income tax-free to beneficiary versus the gain being taxable on the death benefit from a nonqualified annuity There is potential for an income tax deduction when an annuity is surrendered at a loss - IRC An annuity is a transaction entered into for profit or loss - If annuity is purchased for profit, then loss is deductible as an ordinary loss per Revenue Ruling , C.B Annuity must be fully surrendered - Deduction may be taken on Schedule A as a miscellaneous deduction subject to 2% floor - IRS Publication 575 Considerations prior to implementing the strategy: New life insurance product may not have the same liquidity that the annuity may have had Do not surrender annuity until underwriting decision is complete and offer is made Make sure life insurance is in place prior to surrendering annuity Pay (2) months premium in advance to get policy issued Keep in mind any surrender charges that may apply when surrendering the annuity Surrender charges are NOT considered part of the tax-deductible loss If buying another annuity, be careful of the wash sale rule wait 30 days before purchasing another annuity after surrendering the annuity with the loss to avoid the loss deduction being disallowed Target Audience: Insurable individuals holding on to underwater nonqualified annuities for the death benefit. This idea will potentially be more common during a prolonged bear market. 23) Charity-Owned Annuity Charity may own a deferred annuity 10

11 Purchased for income guarantee, death benefit protection or use of a fixed-rate growth option Contract Structure: - Owner = Charity - Annuitant = A person of prominence within the organization (board member, executive director, trustee, etc) - Beneficiary = Charity No spousal benefits may be used on a charity-owned annuity Only one annuitant may be named no co-annuitant or contingent annuitant Annuity does not receive tax deferral - owned by a non-natural entity Because the charity is a tax-exempt entity it pays zero tax on the year-over-year gain Target Audience: A charitable organization exploring alternative investment options to meet the needs of the charity, while better managing risk 24) Funding Long Term Care Insurance (LTCi) from a Deferred Annuity Another reason to purchase a NQ annuity now potentially tax-advantaged future LTCi funding 1035 from a deferred annuity to stand alone LTCi policy Cannot 1035 from annuity to life policy with a LTC rider Partial exchanges from annuity cash value each year to pay LTCi premiums Partial exchanges done pro-rata which means exchanged amount contains same ratio of gain to basis as source contract Allows taxable annuity gain to be received as tax-free LTC benefit if owner qualifies under LTCi policy to receive benefits Annuity owners should be aware of any surrender charges before undertaking 1035 exchanges to fund LTCi Target Audience: (1) Clients who may have a need to fund future LTCi premiums and want to do it in potentially tax-advantaged way. (2) Clients who have deferred annuities with deferred gains and are looking to fund LTCi premiums 25) Avoiding Nonqualified Annuity Aggregation Contracts purchased by same owner, with same company, in same calendar year are aggregated together for cost basis purposes Applies to both cash purchases and purchases via exchange Avoid aggregation by: Have each spouse own one annuity Purchase annuities in different calendar years Purchase annuities with different companies Target Audience: Clients considering purchasing multiple nonqualified annuities should be aware of these rules and how to avoid the negative consequences of aggregation 11

12 Not all Nationwide products and services are suitable for all clients or situations. There may be products, issued by other companies, which better suit your clients goals. Be sure to consider your clients objectives, their need for cash flow and liquidity, and overall risk tolerance when using any strategy. The information in this material is for illustrative purposes only and is not intended as investment advice to you or your clients. You are solely responsible for determining the suitability of advice or recommendations you develop for your clients, including strategies that incorporate concepts or information presented in this material. This information was developed to promote and support products and services offered by Nationwide. It should not be taken as tax advice. It was not written or meant to be used by any taxpayer to avoid tax penalties, and it cannot be used by any taxpayer for that purpose. Life insurance and annuities are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio, member of Nationwide Financial. The general distributor for variable insurance products is Nationwide Investment Services Corporation, member FINRA. In Michigan only: Nationwide Investment Svcs. Corporation. Federal income tax laws are complex and subject to change. The information in this memorandum is based on current interpretations of the law and is not guaranteed. Neither Nationwide, nor its employees, its agents, brokers or registered representatives gives legal or tax advice. You should consult an attorney or competent tax professional for answers to specific tax questions as they apply to your situation. Nationwide and the Nationwide framemark are registered service marks of Nationwide Mutual Insurance Company. Nationwide Financial Services, Inc. All rights reserved. Nationwide Investment Services Corporation, Columbus, Ohio, member FINRA. NFM-11042AO.2 Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution Not insured by any federal government agency May lose value 12