Foresters Financial Partners Desktop Sales Maker Series

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Foresters Financial PartnersDesktop Sales Maker
Series   

• Host Ira Gottshall, CLU, ChFC, RFC
• President CEO - FFP
• Guest Robert Scheftt, JD, MBA, CFD
• Advanced Sales Marketing
• American National Insurance
  Co.

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Annuity Sales Ideas
AMERICAN NATIONAL INSURANCE COMPANY
ROBERT W. SCHEFFT, JD, MBA, CFP ADVANCED SALES
AND MARKETING
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Disclaimer

• American National Insurance Company does not
  provide legal or tax advice
• Any concepts or examples are for illustrating
  purposes only and should not be relied upon
• This presentation is to be used for agents only
  and is not to be shown to the public
• Any individual should consult their tax, legal
  and financial advisors prior to entering into any
  transaction

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TOPICS

• Annuity Wealth Transfer
• Split Funding
• Stretch IRAs
• 162 Executive Bonus With Annuities
• Social Security Benefits Strategies
• Cash Flow Strategies
• Tax Return Sales Ideas
• Charitable Gift Annuity

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Annuity Wealth Transfer

• Deferred Annuities and Retirement
• The Double Taxation Trap
• Income in Respect of a Decedent
• Annuity Wealth Transfer
• Conclusion

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Deferred Annuities

• Deferred Annuities are one of the best places to
  grow assets in that all taxes are deferred until
  withdrawal of the funds
• With tax-deferred growth, assets will always grow
  more rapidly over a period of time than if the
  growth of those assets is taxed each and every
  year
• Many of our clients purchased deferred annuities
  a number of years ago and growth has dramatically
  increased the value of these annuities

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Deferred Annuities

• Many of the people who were able to save out of
  their own pocket also contributed fully to their
  retirement plans and IRAs
• Many of those people have saved enough through
  their employers qualified plans to have more
  than enough to retire on.
• Some of those people will not ever need to take
  withdrawals from their deferred annuity
• For those individuals, they may simply decide
  they will pass on their deferred annuity to their
  children

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Annuity Wealth Transfer

• For those individuals who will not need their
  deferred annuities for retirement income, there
  is a better way to use these funds to benefit
  their family
• The Annuity Wealth Transfer Concept leverages up
  the deferred annuity dollars into a significantly
  larger benefit after the annuitants death

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Double Taxation Trap

• While deferred annuities are the best place to
  grow money, they are one of the worst places to
  die with money
• The reason is the double taxation of the deferred
  annuity that takes place at death
• First, the entire annuity is taxable in the
  individuals estate
• Secondly, after a partial deduction for any
  estate tax paid on the deferred annuity, the
  remaining gain in the annuity is taxed to the
  beneficiaries of the annuity, potentially leaving
  a fraction of the deferred annuity for heirs

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Income in Respect of a Decedent

• Some assets consist of income in respect of a
  decedent (IRD), and if a family member receives
  an IRD asset, he or she will be subject to income
  tax on it
• Assets such as an individuals home, their stock
  portfolio, non qualified and non IRA investment
  assets such as real estate etc. all receive a
  step-up in basis upon death
• Certain assets such as qualified plans, IRAs,
  deferred compensation, savings bonds and deferred
  annuities do not receive a step-up in basis and
  are therefore an IRD asset

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Income in Respect of a Decedent

• Assets containing IRD do not receive a step-up in
  basis at death and the income carries over to the
  beneficiary and is taxed to the beneficiary as
  received
• However, the beneficiary receives a deduction for
  the estate tax paid on the annuity that is
  pro-rated against the income in respect of a
  decedent as received by the beneficiary
• This is not a direct set-off against the IRD
  income but is taken as an itemized deduction

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Income in Respect of a Decedent

• Individuals with assets over 2,000,000 in 2008
  or over 1,000,000 in 2011 or later may have to
  pay estate tax at death
• To determine the estate tax on the deferred
  annuity, estate tax is computed on the entire
  estate and then on the estate less the value of
  the deferred annuity
• The difference between the two amounts represents
  the maximum IRD income tax deduction that can be
  taken against the deferred annuity distributions

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Income in Respect of a Decedent (IRD)

• For individual taxpayers, the IRD income tax
  deduction is available only if they itemize
  deductions but isnt subject to the 2 adjusted
  gross income floor for miscellaneous deductions
• Taxpayers in higher tax brackets could lose some
  of the benefits of the deduction because of the
  3 phase-out of itemized deductions for income
  over 239,950 for married individuals filing
  jointly and 159,950 for singles

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Double Taxation Trap

• The bottom line is that deferred annuities are
  subject to both income taxes and estate taxes
  and the amount depends on what estate tax bracket
  the individual is in and what income tax bracket
  the beneficiary is in
• The higher the tax brackets and the more growth
  in the annuity between the purchase date and the
  date of death, the smaller the percentage that
  will be received by the beneficiaries
• If you have clients in this situation, they may
  be candidates for the Annuity Wealth Transfer
  Strategy

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Annuity Wealth Transfer

• The annuity wealth transfer strategy is
  appropriate for some individuals who are in
  retirement or getting ready to retire and do not
  believe they will need any of the money from the
  annuity for retirement
• For those individuals who wish to pass these
  assets to loved ones at their death, this concept
  may dramatically increase the benefits their
  heirs can receive

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Annuity Wealth Transfer

• First, determine the after tax income available
  either through annual withdrawals from the
  deferred annuity or from transferring the
  deferred annuity to a SPIA to ensure the premium
  dollars will be available for the premium pay-in
  period whether it is a lifetime premium or a
  limited pay premium
• Once the after-tax income is determined,
  illustrations can be run to determine what the
  maximum death benefit would be and how best to
  fund, i.e. ten pay, lifetime pay etc.

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Annuity Wealth Transfer

• For individuals with taxable estates, an
  Irrevocable Life Insurance Trust (ILIT) should be
  used to hold the policy in order to escape
  taxation of the death benefit
• An ILIT allows present interest gifts of 12,000
  per beneficiary (13,000 in 2009) to the trust to
  fund premiums
• If there are insufficient beneficiaries to fund
  present interest gifts to the trust, the
  individual can use a portion of their 1,000,000
  lifetime exclusion for gift tax purposes to fund
  or could also make private loans to the trust

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Annuity Wealth Transfer

• Once the insurance has been approved and the
  Trust is drafted and executed, the policy can be
  issued and put into place with the Trust as the
  owner and beneficiary
• Once that takes place, the death benefit will
  pass outside of the estate of the annuitant and
  the death benefit will pass tax free to the
  beneficiaries
• We will have taken an asset subject to losing a
  majority of its value at death to creating an
  asset that will pass free of all taxes

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Annuity Wealth Transfer

• Lets Look at an Example
• Couple age 66 has annuity worth 700K with basis
  of 150K
• Dont need income for retirement
• Not aware of double taxation
• Move to SPIA and fund insurance on H or W
• SPIA payments fund 1,450,000 policy in ILIT

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Annuity Wealth Transfer

• After 15 years
• Annuity has value of 1.4 Million with basis of
  150K
• 1.25 million taxable income
• Estate Tax _at_45 630,000
• Income Tax _at_40 248,000
• Total Taxes 878,000
• Net to Heirs 522,000

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Annuity Wealth Transfer

• With Annuity
  522,000
• Using Annuity to
• fund life insurance
  1,450,000
• Increased Net to Heirs
  928,000

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Annuity Wealth Transfer

• The one key in utilizing this concept with
  clients is that the client must not need this
  asset to fund their retirement income
• We must be sure this asset does not represent a
  majority of the clients assets so that we are
  not using money for beneficiaries that the
  clients may need themselves during their life
• In the right situation, this can be a huge
  benefit to the clients family

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Annuity Wealth Transfer Conclusions

• The annuity wealth transfer can help individuals
  who do not need income from deferred annuities
  and would rather use this unneeded asset to
  maximize what they are able to provide for loved
  ones
• It can take an asset that may be heavily taxed at
  death and use the leverage of life insurance to
  dramatically increase what beneficiaries receive
• However, we must make sure this is not an asset
  that the client is relying on for their retirement

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Split Funding vs. Investment Assets

• The Annuity Wealth Transfer Concept works with
  other assets besides annuities.
• It works just as well with an IRA or with a CD or
  Bond
• Rather than receive low rates from a CD, an
  individual in their 70s can increase income with
  a SPIA and can re-grow the principal left over
  for their loved ones
• They will have increased their income, guaranteed
  the income for life and will have principal left
  over that can be invested in a life insurance
  policy that can provide the original principal
  for loved ones

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Annuity 10 Arbitrage

• Annual annuity reviews provide an opportunity to
  update a clients plan and can provide a great
  way to increase sales
• If a client will not need all of their annuity,
  consider a plan to withdraw 10 per year from the
  annuity
• The money can be used to fund a life insurance
  policy for loved ones
• The policy can be owned by an ILIT if the client
  has a taxable estate

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Insured Annuity Concept

• If a client needs life insurance, consider
  finding ways to fund the policy so the client is
  not searching for money each year
• Have the client purchase a SPIA where the after
  tax proceeds are sufficient to pay the premium on
  the life insurance policy
• Corporate Insured Annuity uses the same concept
  by a corporation that may want key man insurance
  or may want to provide a deferred comp benefit to
  a key employee and has the money available now

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Risk Based Annuity Selling

• Clients in retirement who no longer can earn the
  big money they earned while working are concerned
  about the risk of loss in retirement and the risk
  of running out of money
• We can transfer the worry and the risk from the
  client to an insurance carrier and guarantee the
  client will not run out of money
• We can take away the risk of lack of
  diversification, income taxes, social security or
  lack thereof, or living too long Its called a
  SPIA!

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Risk Based Annuity Selling

• Family history of long life is a blessing but
  also a concern that a SPIA can solve
• Concerns about inflation affecting purchasing
  power can be alleviated with a SPIA with an
  inflation factor
• Living on interest only due to a fear of tapping
  into principal is solved with a SPIA that covers
  a clients fixed expenses
• Concern about a spouse or relatives ability to
  manage money is eliminated by providing an
  automatic payment through a SPIA to loved ones

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Life Event Planning Using Annuities

• Life Changing Events
• Getting Married
• Buying a Home
• Planning for College
• Planning for Retirement
• Starting a Business
• Estate Planning

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Life Event Planning Using Annuities

• Use these life events to get a client to save and
  invest
• Although short term savings events such as a
  wedding will use money market or mutual fund
  vehicles, using annuities can be a great way to
  provide the client money for some of the longer
  term life events
• Using deferred annuities and SPIAs is a great way
  to save and pay for various major long term
  outlays

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Stretch IRA

• Over the next ten to twenty years there will be a
  huge demographic shift as the baby boomers start
  to retire or transition into new careers or part
  time work
• In addition, most individuals will change jobs or
  careers several times during their working years
• All of this will lead to money in motion which
  equates to opportunity for agents who can provide
  their clients solutions to their problems
• These individuals will need vehicles to hold
  retirement assets and a steady stream of
  retirement income

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Stretch IRA

• IRAs and Qualified Plans are a great place to
  save and grow money but one of the worst ways to
  leave money to loved ones
• Why? Because like the deferred annuity, the
  money left to heirs is often taxed twice!
• First the money is taxed in the IRA holders
  estate
• Then, it is taxed on the beneficiaries income tax
  return
• Not unusual to see 70 of DOD value taxed away

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Stretch IRA

• Joe and Ginger have a 6,000,000 estate with
  2,500,000 in Joes IRA
• Joe dies and 2,000,000 goes into the Credit
  Shelter Trust and the remaining assets as well as
  the IRA pass to Ginger
• When Ginger dies, the IRA is included in her
  estate and must be taken out by her children over
  a five year period
• By having the IRA taxed in Gingers estate, this
  will generate 450,000 in estate tax in 2008

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Stretch IRA

• If Ginger dies soon after Joe, the income may be
  taxed over a five year period and the beneficiary
  will receive 1,230,000 or 49 of the
  2,500,000
• By stretching out the IRA we increase the amount
  that surviving spouses and children can receive
  over their lifetime
• This protects the money and provides for loved
  ones for years after the IRA holders death

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Stretch IRA

• A Stretch IRA allows the money to stay in the
  IRA growing tax deferred as long as possible
• By taking minimum distributions, the IRA holder
  can pass the account to his or her spouse if
  applicable and can also pass the account to
  children stretching out the payments for multiple
  generations while taking advantage of tax
  deferred build-up
• In the case of a Roth IRA, the build-up is tax
  free which can result in a significant increase
  in net to heirs

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Stretch IRA

• A stretch IRA maximizes the value of the IRA for
  loved ones
• Stretch IRAs create a lifetime stream of income
  for loved ones
• Stretch IRAs minimize income taxes by stretching
  out the IRA payments and income taxes
• Stretch IRAs allow for maximum tax deferred
  growth of assets

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Stretch IRA

• A stretch IRA distribution strategy is
  appropriate for individuals who have additional
  investment assets and can afford to take minimum
  distributions only
• Individuals still have to take minimum
  distributions after reaching age 70 ½
• By taking minimum distributions money continues
  to compound tax deferred allowing for more money
  to be paid out to beneficiaries
• Fixed annuities can offer safety, guaranteed
  interest rates, flexible contributions and
  payouts and liquidity

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Stretch IRA Conclusions

• An IRA may be the largest asset to pass to loved
  ones
• Protecting that IRA and making it last for
  spouses and children can be the biggest gift an
  IRA holder can give their family
• Stretch IRAs can increase the net amount to
  beneficiaries and protect families for years to
  come
• By structuring the traditional or Roth IRA
  properly prior to the IRA owners death, an IRA
  owner can preserve the IRA funds for the
  beneficiarys life

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162 Executive Bonus Plan Using An Annuity

• With new 409(a) rules making it difficult to
  structure and maintain a Deferred Compensation
  Plan, using an Executive Bonus Plan with a
  Deferred Annuity may be the answer
• With a 162 Executive Bonus Plan, the company gets
  an immediate deduction and the employee receives
  immediate income
• If the employer funds a deferred annuity owned by
  the annuitant/key employee they can provide a
  benefit to the employee

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162 Executive Bonus Plan Using An Annuity

• By using an annuity, they can vary the
  contribution from year to year which is more
  difficult to do with a life insurance policy
• By having the annuity owned by the employee, they
  receive the tax-deferred build-up from the
  annuity
• The employer is able to provide the employee a
  benefit and yet deduct the bonus for funding the
  annuity
• To further tie up the employee, the employer can
  have the employee sign a document that if they
  leave during the term of the agreement, the
  employee must repay the bonuses

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Social Security Benefit Statements

• Each year after an individual turns age 25 Social
  Security sends out a benefits estimate 60 days
  prior to an individuals birthday
• The statement projects how much someone is
  expected to receive in retirement
• For clients nearing retirement, these statements
  can cause a lot of concern as they can see it
  will not be enough to fund their cash flow needs
  in retirement
• The statement shows the benefit of purchasing a
  SPIA to supplement retirement income

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Full Social Security Benefits Strategy

• Do some of your clients take early social
  security benefits at age 62?
• With the crossover for taking early benefits
  approximately 12 years out and with surviving
  spouses living longer, it makes sense to wait to
  take social security until eligible for full
  benefits
• Consider selling the client a 4-5 year SPIA at
  age 62 so the client can postpone social security
  until full benefits can be received

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Reduce Retirement Depression

• A recent study by the Rand Center for the Study
  of Aging found that retirees who have lifetime
  annuity income are less likely to suffer from
  depression than those who manage their own
  withdrawals from investments
• People have a fear of outliving their income and
  a SPIA can help alleviate this fear
• Discuss with individuals who have elderly parents
  the concept of income the parents cannot outlive
  and the reduction of stress on their parents this
  can bring

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Give Your Clients a Raise

• Many clients in retirement have seen their income
  decline with lower interest rates
• CDs and other fixed income vehicles are returning
  very low yields resulting in much less retirement
  income available for people who are afraid to
  delve into principal and see themselves penniless
  someday with no income other than Social Security
• Taking a portion of their CD money and placing
  this money into a SPIA will guarantee that they
  will not run out of money no matter how long they
  live and will provide a larger annual income to
  meet living needs

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Individuals Accustomed to Salary

• Most individuals have worked their whole lives
  and received a steady salary each year to meet
  their living expenses
• Retirement is like going on commission as
  investment returns will fluctuate and retirement
  income will not normally be as steady as their
  salary was
• SPIAs offer steady retirement income that is
  predictable and which will never run out

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Wealthy People Roll-Over Pension Balances

• Individuals who have a large net worth do not
  annuitize their Pension Plans but instead take
  lump sums and invest them with investment
  advisors
• These individuals have higher fixed costs than
  what their social security will pay for
• These individuals need a steady income so they do
  not have to liquidate assets in down markets
• SPIAs can fill the income gap for wealthy retirees

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Individual Tax Returns Provide Sales Ideas

• There are multiple sales ideas that can be found
  in an individuals tax return and the return is a
  road map to finding premium dollars and sales
  opportunities
• Line 8B contains the amount of tax-free interest
  an individual receives and that income is added
  in when determining whether an individuals
  social security will be taxable
• If that income is not needed and is in a tax
  deferred annuity, it will not count towards
  making their social security taxable until
  withdrawn

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Individual Tax Returns Provide Sales Ideas

• Line 8A contains taxable interest
• If an individual is in retirement, you can ask
  the prospect if their taxable interest has gone
  down over the past couple of years and would they
  like to look at an asset that can provide a
  guaranteed lifetime income A SPIA
• If the individual is still working, you can
  introduce a tax deferred annuity and show them
  how they will have a greater return and receive
  tax deferred growth on the account

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Individual Tax Returns Provide Sales Ideas

• Line 9A reflects the amount of dividends an
  individual receives
• If the individual is still working, these
  dividends are taxed annually and may be taxed at
  a higher rate in 2009 under various tax plans
  floated by Congress
• A variable annuity will provide similar results
  to individual stocks or mutual funds but with
  tax deferral of all gains and dividends until
  withdrawal

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Deferred Annuity as a 529 Plan Substitute

• From 529 Plans to mutual funds to savings
  accounts, there are many ways to save for
  childrens college
• All of the above methods will impact how much can
  be obtained through grants or loans as these
  assets are counted towards available assets and
  reduce what can be available from grants and
  loans
• Non qualified deferred annuities do not currently
  count as an asset used in computing assets
  available for college education

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Deferred Annuity as a 529 Plan Substitute

• The most widely used applications for student aid
  PROFILE and FAFSA both currently exclude
  retirement plans including annuities when
  determining the amount that can be available for
  paying for college
• This could always change between now and when the
  child applies for college but annuities currently
  are excluded
• If the parent is not 59 ½ when the student enters
  college, the annuity withdrawals may incur
  penalty tax

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Charitable Gift Annuity

• Do you have clients complaining about the
  decrease in income they receive from their fixed
  income investments?
• Are these clients also concerned about living too
  long and running out of money?
• Are any of these clients charitably inclined?
• If you have clients that fit this profile, they
  may be candidates for a charitable gift annuity

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Charitable Gift Annuity

• A Charitable Gift Annuity is a way for a client
  to make a gift to their favorite charity while
  still receiving an income for themselves or
  others for life
• A charity, in return for cash or other property,
  agrees to pay a fixed amount for either one
  individuals life or two lives
• The person contributing the cash or property is
  the donor and the person receiving the annuity is
  the annuitant or beneficiary

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Charitable Gift Annuity

• Payments are fixed from the beginning and the
  charity is contractually obligated to make the
  payment
• Factors affecting the size of the payment are
  impacted by
• Age of the annuitants with the older annuitants
  receiving a higher income than younger annuitants
• Value of the contribution
• Gift rate offered by the charity
• The number of annuitants

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Charitable Gift Annuity

• Charitable Tax Deduction
• The donor receives a charitable deduction that
  can offset taxable income
• The amount of the deduction is based on the value
  of the gift to charity
• The value of the gift is the remainder interest
  to charity
• The donor or beneficiary receives an income for
  life, the value of which is deducted from the
  total gift leaving the remainder interest to
  charity

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Charitable Gift Annuity

• Why is there not a correlation between the tax
  deduction and what remains after purchasing an
  annuity from an insurance company?
• American Council on Gift Annuity Assumptions
• Assumes every donor is a female and is 18 months
  younger than their actual age
• Assumes a 6 gross and 5 net investment return
• Assumes an average 50 remainder interest
• If the annuity costs 70, how does charity get
  50?

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Charitable Gift Annuity

• No correlation between tax deduction and what is
  left after purchase of the annuity
• Time value of money concept is fact that 50
  remainder will be received in the future
• Present value of 50 in future money is about 30
  (money today)
• Insurance companys use an internal life
  expectancy table and not ACGA assumed life
  expectancy table

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Charitable Gift Annuity

• Example
• James, age 72 is a widower who has watched CD
  rates decline down to 3 and James is feeling the
  pain of less income each month
• James is a regular church-goer and does not have
  any children
• One Sunday in church James hears about a
  charitable gift annuity and likes the idea of
  getting a higher income while benefiting his
  church while he is still alive

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Charitable Gift Annuity

• James talks to an insurance agent and a
  development officer of the church and tells them
  he has a 100,000 CD that is coming due in the
  next week that pays 3
• James is told that the American Council on Gift
  Annuities suggested rate for a 72 year old is
  6.3 or 6,300 per year with the taxable amount
  only 1,436
• This would only be partially taxable because a
  portion is a return of premium
• Since the remainder interest goes to charity
  James would receive a charitable deduction of
  42,921

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Charitable Gift Annuity

• CD
• Value 100,000
• Interest Rate 3
• Annual Income 3,000
• After Tax _at_ 35 1,950

• Charitable Gift Annuity
• Value 100,000
• Interest Rate 6.3
• Annual Return 6,500
• After Tax _at_35 5,797
• Increased Income 3,847
• An Increase of 297
• Value of tax deduction 15,022

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Charitable Gift Annuity

• As a result of the gift to charity, James
  receives a significantly increased income and a
  tax deduction that can reduce income and be
  carried forward if the deduction cannot be all
  used in one year
• The charitable gift annuity is a win for the
  client and a win for the charity
• Many states have stringent rules about providing
  annuities for a Charitable Gift and in states
  such as New York and New Jersey special rules
  apply
• Check your state rules before preceding consider
  working with a community foundation

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Annuity Sales Ideas

• With a choppy investment market and low interest
  rates, annuities of every kind look better and
  better
• Deferred annuities provide tax deferred build-up
  so a client winds up with more money in
  retirement
• SPIAs provide a steady income in retirement that
  an individual cannot outlive
• We need to take advantage of the marketplace and
  the safety we can provide our clients in these
  trying times
• WE SELL INCOME!!!!

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