Page 55 - MetalForming May 2016

the same premium amount to buy $6.5 million of second-to-die insurance, resulting in an increase of $2.5 million in tax-free wealth, without any addi- tional cost.
Almost 100 percent of the time, a lifetime strategy can be used to increase the value (usually tax-free) of each asset or reduce the potential estate tax lia- bility of that asset. If you’ve completed an estate plan, go back and look at how a lifetime plan can increase your fam- ily’s wealth after you die.
How to Escape the Annuities Tax Trap
If you own annuities, this article is must reading. If you intend to buy annu- ities, read this article before you buy.
It should be noted that most insur- ance companies have many annuity products, each a bit different. There are literally thousands of possibilities, but in spite of that, the type of annuity most often sold is a deferred annuity, which we will explore in-depth.
Why do so many people buy deferred annuities? Because they are charmed by the annuity salesman's standard sales pitch. Remember, almost all American taxpayers hate paying taxes. Knowing this, the insur- ance industry teaches its sales people to highlight that earnings, on the amount invested in the annuity, are tax-deferred. This means that when the value of your annuity account increases, no tax is due on those prof- its until you actually take the funds.
Sounds great, but two sad facts haunt every deferred annuity: 1) you bought a lousy insurance policy; and 2) you created a tax trap.
According to Ken Fisher, longtime author of the "Portfolio Strategy" col- umn in Forbes, “The vast majority of annuities are really complicated insur- ance policies that make it very difficult to fully understand the implications and unintended consequences. And once you buy into an annuity, it can be a very difficult, and potentially, very costly investment decision to reverse."
Let's explore the two sad facts, one at a time, using Carol as an example.
The Lousy Insurance Policy
Carol, a healthy 60-yr.-old, buys a $500,000 deferred annuity. When Carol dies, the annuity is worth $960,000, including a $460,000 profit. The bene- ficiary of Carol's annuity is her daugh- ter Jan. Yes, Jan gets the full $960,000. But wait, if Carol had purchased a life insurance policy with that $500,000 as a single premium, the death benefit, free from income tax and estate tax, would be in the $2-million range.
Worse yet, the entire $960,000 is subject to estate tax in Carol's estate, and the $460,000 profit is taxable income in the year that Carol dies—a double-tax. Studies show that more than 90 percent of all deferred annuities are held (never annuitized) until the owner's death, as in Carol’s case.
A Real-Life Example
Scott (a real-client) is 75 years old and in good health. He owns an annu- ity that cost him $734,916 and has a current value of $2,015,749, with a deferred profit of $1,280,833. Scott passes away. Because of new income tax rates, income from annuities are subject to a top unearned income tax rate of 39.6 percent and an additional "surcharge" of 3.8 percent. That's a total tax rate of 43.4 percent on the $1,280,833 deferred profit. So, the income tax burden is $555,882.
But there's more to this tax horror story. The value of the annuity, less the income tax burden, is subject to a 40- percent estate tax. The tax liabilities, income and estate, will only get worse as time goes by as the value of the annuity continues to grow. Simply put, the double tax liability, $1,139,829, will never go away; it will only increase. You are in a tax trap.
Escape the Double Tax
and Create Tax-Free Wealth
The following strategy is a simple two-step process:
Step 1—Annuitize the annuity value ($2,015,749). The insurance company
agreed to pay Scott $170,968 (annual annuity) every year, for as long as he lives.
Step 2—By law a portion of Scott's annual annuity is subject to income tax. We used the after-tax annuity amount ($123,461) to pay the annual premium on a life insurance policy on Scott for $2,681,166. This amount is tax-free. No income tax according to the Internal Revenue Code, and no estate tax because the policy is owned by an irrevocable life insurance trust. And as long as Scott lives, he is guar- anteed to collect the annuity and will always have funds to pay his insurance premium.
A few important things you should know:
• Scott's tax-free insurance pro- ceeds: $2,681,166; after-tax value of deferred annuity: $875,920; increase in after-tax amount: $1,805,246.
• In a 43.4-percent income tax bracket and 40-percent estate tax bracket you must earn $2,944,641 to leave your family $1,000,000. So, you can see that the above-stated increase of $1,805,246 gives about the same after-tax results as earning about $5.4 million.
This strategy works for one life (you are single or, if a couple, only one spouse is insurable) or two lives (sec- ond-to-die insurance for husband and wife).
My insurance guru has agreed to review possibilities for readers of this column who own annuities. Just two rules: 1) You should own $500,000 or more in annuities (current value) that have not been annuitized; and 2) if sin- gle you are insurable or if married, at least one spouse (or both) is insurable.
If interested, provide me with the full name and birthday for those to be insured; your address and phone num- bers (business, cell, home) where you can be reached; and a list of your annu- ities (name of insurance company, orig- inal cost and current value). Send this information to Irv Blackman, Annuity Strategies, 4545 W. Touhy Ave., #602, Lincolnwood, IL 60712. MF
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Blackman on Taxes