Tag Archives: annuities

Weaknesses And Strengths Of Wealth Management Advisers, Service Models - AZ Business Magazine June 2010

Popular IRAs Have Dark Downsides, Experts Warn

IRAs and annuities are growing in popularity as retirement investment options, according to recent surveys, but three financial experts warn they can have serious disadvantages.

“Last year, four out of 10 U.S. households had IRA accounts – that’s up from 17 percent two decades ago,” says CPA Jim Kohles, chairman of RINA accountancy corporation, citing an ICI Research survey. “But they can be bad for beneficiaries if you have a very large account.”

Investment in annuities, touted as offering a potential guaranteed income stream, alsocontinue to grow with sales up 10 percent in the second quarter of this year.

“Annuities have several dark sides, both during your lifetime and for your beneficiaries,” says wealth management advisor Haitham “Hutch” Ashoo, CEO of Pillar Wealth Management. “My business partner, Chris Snyder, and I wouldn’t recommend investing in them.”

Putting large amounts of money in either annuities or IRAs can have serious tax consequences for your heirs, say Kohles, Ashoo and attorney John Hartog of Hartog & Baer Trust and Estate Law.

“If you want to ensure your beneficiaries get what you’ve saved, you need to take some precautions,” Hartog says.

The three offer these suggestions:

• Take stock of your assets – you could be worth more than you think: If your estate is worth more than $5.25 million (for couples, $10.5 million), your beneficiaries face a 40 percent estate tax and federal and state income taxes, says Kohles, the CPA. “It can substantially deplete the IRA,” he says.

To avoid that, take stock of your assets now – you may have more than you realize when you take into account such variables as inflation and rising property values. Be aware of how close to that $5/$10 million benchmark you are now, and how close you’ll be a few years from now.

“Consider vacation and rental properties, vehicles, potential inheritances,” Kohles says.

Also, take advantage of the lower tax rates you enjoy today, particularly if they’re going to skyrocket after your death. “A lot of people want to pay zero taxes now and that’s not necessarily a good idea,” he says. For instance, if you’re at that upper level, consider converting your traditional IRA to a ROTH IRA and paying the taxes on the money now so your beneficiaries won’t have to later.

• No matter what your estate’s value, avoid investing in annuities. Wealth management adviser Ashoo warns annuities, offered by insurance companies, can cost investors an inordinate amount of money during their lifetime and afterward.

“Insurance companies try to sell customers on the potential for guaranteed income, a death benefit paid to beneficiaries, or a ‘can’t lose’ minimum return, but none of thosecompensates for what you have to give up,” he says.

That includes being locked in to the annuity for five to seven years with hefty penalties for pulling out early; returns that fall far short of market investments on indexed annuities; high management fees for variable annuities; declining returns on fixed-rated annuities in their latter years; and giving up your principle in return for guaranteed income.

“If you own annuities and have a substantial estate, there are smart ways to unwind them to minimize damage,” Ashoo says.

• Consider spending down your tax-deferred IRA early. If you’re in the group with $5 million/$10 million assets, it pays to go against everything you’ve been taught and spend the IRA before other assets, says attorney Hartog.

“It’s a good vehicle for charitable gifts if you’re so inclined. And if you’re 70½ or older, this year you can direct up to $100,000 of your IRA-required minimum distribution to charity and it won’t show up as taxable income,” Hartog says. (That provision is set to expire next year.)

You might also postpone taking Social Security benefits until you’re 70½ and withdraw from your IRA instead. “That willmaximize your Social Security benefit – you’ll get 8 percent more.”

Finally, anyone who has accumulated some wealth will do best coordinating their financial planning with a team of specialists, the three say.

As a CPA, Kohles is focused on minimizing taxes; wealth management adviser Ashoo’s concern is the client’s goals and lifestyle; and lawyer Hartog minimizes estate taxes.

“We get the best results managing tax consequences and maintaining our clients’ lifestyles by working together,” Hartog says.

Investment Products

Investment Products: Which Is Best For Me?

Investment Products: Which Is Best For Me?

The financial industry continues to develop innovative products and improve services. As consumers we can feel overwhelmed when faced with choosing a product for our needs.

There are many products for different needs, and when faced with choosing one, it can be difficult. Investors have many choices and can use different avenues to invest their money. These options include stocks, bonds, mutual funds, annuities, and real estate.

Types of Investment Products

Stocks: Stocks are an equity position in a corporation that can provide the possibility of investment growth.

Bonds: Bonds, on the other hand, are a debt instrument that is issued by the state, government, city, municipality or corporation, and can repay the original investment along with interest.

Mutual fund: An investment company that pools money from many investors and invests it based on specific investment goals.

Annuities: Annuities are financial products sold by an insurance company that is designed to help reach financial goals and can provide income.

Real estate: Lastly, real estate is another option that can be used by owning property or investing in real estate investment trust.

These are only some products that can help investors fulfill their investment needs.

(You should consider the investment objectives, risks and charges and expenses of mutual funds carefully before investing. The prospectuses contain this and other information, which can be obtained by contacting your representative. Please read the information carefully before investing. Add a standard risk disclosure due to the discussion of specific investments: Investments are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate and when redeemed may be worth more or less than the original investment.)

Which investment product is right for me?

It depends on an investor’s goals, risk tolerance and time horizon. An investor should consider these factors and work with a financial professional to help decide the best product for him or her.

Each of these investment products has strengths and weaknesses depending on how they are used. It is also important to apply your personal situation and consider your objectives when deciding on an investment product.

Investors should be cautious when taking advice from marketing ads or television because these sources typically only present the product and its features. How they can apply to your specific situation is important to understand before investing. It is also critical to take the time to thoroughly analyze how each product can be beneficial and consider not only the benefits but also the potential downside risk.

For more information about investment products, visit jacobgold.com.

 

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Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc.

This information was prepared by Michael Cochell of Jacob Gold & Associates Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.

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Using Personally Owned Life Insurance - AZ Business Magazine June 2010

Using Personally Owned Life Insurance (POLI) As A Sinking Fund

Affluent families and individuals, successful business owners, and those engaged in certain occupations, such as the medical or construction industry, all face similar challenges when choosing to invest: They have worked hard to accumulate wealth, and now they want to keep it.

Wealthy investors are driven by the same concerns:
Preservation: Given the choice between risky strategies or preserving what they have, most affluent investors will choose to preserve what they have.

Liquidity: Without access to your money, wealth may not be maximized.

Protection from creditors and frivolous lawsuits: The legal risk posed to affluent investors in today’s society is extraordinary.

Control: Affluent investors value the flexibility that allows them to respond to changes in their personal and business lives.

Taxes: Although we can’t be certain that taxes will go up, the odds suggest they will — perhaps significantly so. Mitigating the bite of the tax man is a top priority for wealthy investors.

To address these concerns, affluent investors and their advisers have many investments to choose from, such as IRA and Roth IRAs, equities and mutual funds, tax-advantaged bonds, annuities and personally owned life insurance (POLI), to name a few. Each of these investments has advantages and disadvantages when addressing the concerns of affluent investors. But what is POLI? To answer this question, we need to look at life insurance in an entirely different way.

Getting the most out of your investment type
What if instead of shopping for the most death benefit for our premium payment dollars, we sought out the federal minimum required death benefit in our policy to keep our insurance costs low and our investment value high? What if we created a “sinking fund” by investing in personally owned life insurance to create a tax-advantaged retirement supplement plan, and much more?

People often don’t recognize the value of permanent life insurance as an asset in their portfolios. Cash value life insurance offers much more than simple death protection.

Consider the following asset characteristics:
Qualified plan and annuity assets, in addition to being included in the taxable estate of an owner, are also subject to income in respect of decedent (IRD) at death. Seventy percent is an estimate of the combined impact of estate and IRD taxes, as well as credits given in the high net-worth decedent’s estate. The number can be higher or lower depending on the applicable marginal brackets.

Death benefits of a life insurance policy are generally received income tax-free by the owner of the policy. In order to avoid estate inclusion, the death benefit must be received outside the estate, often by designating the “B” Trust as the contingent owner and beneficiary of a policy owned by a decedent. Certain types of split dollar and loan transactions used in conjunction with an irrevocable life insurance trust (ILIT) also can be used to exclude the death benefit from estate inclusion. These techniques may involve gift tax implications, such as using a portion of the annual gift tax exclusions.

The benefits of POLI
Structured properly, POLI allow unlimited contributions, tax-deferred accumulation, tax-free redistribution, tax-free withdrawals, total liquidity, no income or estate tax at death, and the possibility of asset protection. This is an extraordinary combination of benefits.

Put simply, when structured properly the investor retains control of all the assets in a POLI account, including the right to terminate the account and withdrawal of the cash value. There is nothing “irrevocable” about a properly structured POLI contract. POLI, when properly structured, allows for nearly unlimited withdrawals after the first year at rates between 1 percent and 0 percent.

Using POLI, unlimited after-tax deposits may be made by the investor to be deployed in the equity and fixed income markets in almost any combination. An additional benefit is that in many states, the assets in POLIs are creditor protected. Asset protection against the creditors of an insurance-based contract owner is a matter of state law. Some states offer no protection for annuities life insurance cash value, some offer some protection for a portion, and others offer complete protection (check with local counsel to determine the applicability of asset protection in a given jurisdiction). Finally, assets invested in POLI are removed from the investor’s estate, while still providing the investor control of the assets.

Life insurance: A cautionary note
Of course, federal tax law definition of “life insurance” limits your ability to pay certain high levels of premiums. In addition, if the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code (IRC), your policy will become a Modified Endowment Contract (MEC). If your policy is a MEC, many benefits of POLI are removed.

An “optimized” life insurance policy involves several elements. First, the contract should pass one of two tests for the definition of life insurance, thus avoiding status as a MEC under IRC 72, which generally limits the amount of cash value or contributions relative to the amount of death benefit. To exceed these limits causes distributions to be taxable. Second, in order to avoid estate inclusions, the death benefit must be owned outside the estate.

These are highly sophisticated and complex investments, and you should discuss whether a POLI is right for you with a knowledgeable team of financial, legal and tax professionals.

Arizona Business Magazine June 2010