When he looked back, Larry could only be grateful. A long and successful career,
a great marriage (though he was widowed), grandchildren, and the kind of financial
planning which enabled him, at age 66, to do pretty much whatever he wanted. Mostly
though he spent his time volunteering because he wanted to give back. But it was
precisely this kind of activity which got him thinking about his daughter Jeannie,
her three kids, and how best to give them the kind of safety net that it took him
more than 30 years to create.
Though Larry has plenty of assets to pass on, it was a question of doing so in a
way that would reduce the tax bite on what he worked so hard to earn. Stocks, bonds
and mutual funds worth about $2 million would pass along to Jeannie without much
of a tax consequence because they were at or beneath the one-time estate tax exemption
and had the benefit of a step-up in cost-basis at the time they are passed on to
Jeannie. However an immediate annuity, 20 years period certain, which Larry purchased
at the end of 2001 for $1.58 million, was keeping him up at night.
And for good reason. If Larry died tomorrow, Jeannie would owe estate taxes equal
to 45% of the annuity's present value of $1.1 million or nearly $500,000. In addition,
any gains from the underlying investments in the annuity contract could be taxed
at Jeannie's ordinary income tax rate. Even when Larry considered the $500,000 tax
liability as a percentage of his total estate, it seemed much too large.
Larry's financial advisor, Carole had access to J.G. Wentworth's Annuity Purchase
Program™ (APP). Using the liquidity it offered annuity owners, Carole came
up with a unique plan where Larry could pass on more than his original annuity premium,
tax free, to his daughter.
Carole had Larry sell $4,000 of the $7,865 he received each month for the next sixteen
years for a total of $448, 910. She then used this lump sum to fund a flexible premium
adjustable life policy with a face value of $1.6 million. During the period for
which he sold payments, Larry would receive $3,865 of his regular monthly payments,
and if he was still living after the 16 years were up, he would then begin receiving
his full payment of $7, 865. But the real benefit was the efficient transfer of
wealth to his daughter.
Specifically, since insurance proceeds are not taxable (assuming the policy is setup
appropriately), Jeannie would get $1.6 million tax-free, versus net proceeds of
a little over $600,000 after the tax bill of approximately $500,000 on the $1.1
million present value in the annuity.
Larry said, "The value of good advice is often hard to calculate, but in my case,
the difference between passing my annuity onto Jeannie versus selling some to buy
life insurance was about $1 million. When I consider what that might be worth if
prudently invested until my grandkids reach college, I'm quite sure that Carole
is worth more than her weight in gold."