Annuities can be purchased inside an IRA, but is an IRA the right home for an annuity? The debate has raged for years and the answer depends on which advisor you talk to. But considering the fact that as many as one-half of variable annuities sales are made in an IRA rollover, the question is key for all annuity producers. The answer turns on whether the producer can sufficiently separate and identify the tax and non-tax client objectives that justify selling a tax deferred product to a tax exempt plan.

No Double Deferral

There’s no such thing as double tax deferral, leading to the biggest client complaint of all about purchasing an annuity in a tax deferred account such as an IRA: An annuity doesn’t offer additional tax deferral when purchased in an IRA, eliminating one of the product’s primary selling points.

Instead, many financial services professionals recommend purchasing investments, such as stocks, that do not otherwise offer tax deferral in a tax deferred account; and if there’s money left over, consider purchasing an annuity outside the account. An investor can sock away only $5,000 a year in an IRA, why “waste” some of the account’s funds by buying an annuity?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of annuities in Advisor’s Journal, see Annuity Respect: Earning It! (CC 11-150) & Annuities: They Get No Respect (CC 11-120).

For in-depth analysis of annuities, see Advisor’s Main Library: A—Amounts Received As An Annuity & B—Amounts NOT Received As Annuities.

Why is this Topic Important to Financial Professionals? All businesses, as well as individuals face some risk, and that form can vary greatly.  Knowledge and identification of certain risks can help position clients in better risk management positions as apposed to ignoring them.

Risks can generally be divided into two sub-classifications; traditional and non-traditional.  Traditional risks are those typically covered by traditional insurance companies such as life insurance or forms of casualty insurance.  However, non-traditional risks are those which are conventionally uninsurable or prohibitively expensive to cover through traditional means.

What are some of the elements that are attributable to traditional insurance?

• Common underwriting standards (for example actuarial tables can accurately predict the insurance expense over time in relation to a large group of individuals).
• Common risk factors in market segment (everyone is faced with death, so the market to solicit this form of insurance is much more prevalent than say insuring an allowance for bad debt account).
• Standard contract terms are assigned (generally terms are not negotiable except premium and some investment risk).

What are some examples of non-traditional risk underwriting?

• Self-Insurance, this is when the business retains the risk by not shifting it to a third party and/or other insurance arrangement.
• Insurance on an actor’s ability to continue acting, or likewise, a sports star who has insured his body caused by physical injury during the season or career.
• Insuring business operations from financial loss caused by, say, a terrorism event or natural disaster.

Why would a business or individual consider alternative risk transfer?

Take for example the actor, who, lets say, is expected to star in a big film.  The production company may purchase a life-insurance policy, which may or may not contain traditional terms, to cover the risk of loss from the death of the actor before the movie is completed.  If the production company does not purchase a life-insurance policy, or similar product, the production company will be said to have self-insured the risk of loss caused by the death of the actor, if it were to occur before the completion of the production of the movie.

On the other hand, assuming the production company did purchase some life policy on the actor, insuring his life for a short period of time, until the completion of the movie, the production company has shifted that risk to a third party insurance company who bears the risk of loss — the stated benefit minus premiums paid, generally.

Assume the actor lives throughout the entire production; however the actor, for artistic reasons (which may or may not be allowed in the contract negotiated between the parties) does not want to continue and/or complete the acting portion of the film after working with a few of the co-stars for a couple of days.  Not only has the production company incurred significant costs associated with pre-production and whatever filming time has accrued, but the production company will most likely want to find a new actor to take the part, an additional expense causing delay costs to increase.

The production company, is similarly, self-insuring the risk that the actor will complete the film without walking off the set.  Self-insurance is generally defined as: “insuring [risk] by setting aside money to cover possible losses rather than by purchasing an insurance policy.” [1]

Here the risk has been identified as the financial loss from the actor walking off the set.  The production company will pay, out-of-pocket, the cost associated with the film until production continues with a new actor.

The example above is just one risk the production company could be exposed to during production of the film.  A complete risk analysis will identify and discuss most known risks and have some financial plan regarding the occurrence of those risks.

On September 17, 2008, $140 billion was drawn out of money market accounts by investors who were transferring their funds to U.S. Treasuries. And on September 18, 2008, the FDIC, realizing that money market accounts were being drawn down in record amounts, pumped over $100 billion into the system.

But after realizing that an influx of cash wouldn’t be enough to prevent a collapse, the Treasury stepped in with a $250,000 guarantee per money market account. If the Treasury hadn’t taken this action, $5.5 trillion could have been drawn out of the market, which could have collapsed the entire U.S. economy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of money market accounts in Advisor’s Journal, see How to Increase the FDIC $250,000 Permanent Guarantee (CC 10-67).

For in-depth analysis of the Dodd-Frank Act, see Advisor’s Main Library: The Dodd-Frank Wall Street Reform and Consumer Protection Act: An Analysis.

by Robert Bloink, Esq. and Prof. William H. Byrnes

Fixed income annuity contracts are a great hedge against longevity risk that can help provide retirement income sufficiency in an increasingly uncertain environment. But even with a fixed annuity, income sufficiency is a tricky goal to attain when you are walking uphill against inflation.

Since a $100,000 annuity pays the same $650/month in January 2032 as it does in January 2012, it must be paired with a strategy that hedges against inflation. Writing for Forbes earlier this month, Stephen Horan, PhD, discussed the lesser-known cousin of the fixed annuity, the inflation-protected annuity.

An inflation-protected annuity is generally a “fixed” annuity that includes a component that ratchets up payments each year to account for inflation. There are two general types of inflation protected annuities: (1) those that account for inflation by increasing payments by a fixed percentage (e.g., 4%) each year to account for inflation; and (2) those with a variable increase that is tied to an inflation indicator like the Consumer Price Index (CPI).

Although Dr. Horan stopped short of recommending inflation-protected annuities, he closed his article by asking his readers “to consider what role a deferred or inflation-protected annuity could play in… [their] long-term financial planning as an instrument for assuring a lifetime income stream.”

Find more about annuities and inflation risk here.

Can life insurance revitalize your high-net worth clients’retirement plans?

Tax-advantaged retirement plans such as IRAs and 401(k)s are great for middle-class employees, but low contribution limits circumscribe their value for high-net worth executives and entrepreneurs. If the $49,000 ($50,000 for 2012) annual contribution limit for 401(k) solos and SEPs is not enough to satisfy your client’s retirement objectives, what is the next step?

Enter life insurance retirement plans (LIRPs), which offer many of the same advantages and none of the limits of their traditional counterparts. But use of life insurance as a retirement savings vehicle is controversial, so caution is warranted.

“Life insurance retirement plan” is (at least according to some critics) little more than a euphemism for “overfunded variable universal life (VUL) insurance policy.” They are typically sold to high-net-worth investors as a pseudo-Roth replacement vehicle offering long-term, tax-free accumulation of income for supplemental retirement needs. They offer the greatest benefit for investors who have already maximized other tax-advantaged retirement savings plans.

One risk inherent in the LIRP concept is the possibility that the policy will be incorrectly overfunded, resulting in the policy being classified as a MEC. Once a MEC, always a MEC; there is no fixing the mistake. If that happens, policy loans will be taxable on an income-first basis, eliminating most of the LIRP’s benefits.

For a complete analysis go to Advisor’s Journal LIRPs: Retirement Alternative

For in-depth analysis of the taxation of life insurance proceeds paid during the insured’s life, see Advisor’s Main Library:   Taxation of Amounts Payable During Life

You give your clients clear instructions about handling their life insurance trusts, but what happens when they disregard your instructions and get themselves into an intractable tax mess by personally paying premiums directly to the carrier? Direct payment of premiums on a policy in an ILIT can net your clients a big gift tax bill. Is there anything you can do to soften the blow and get them back on track?

The Tax Court recently considered a case, Estate of Turner v. Commissioner, where an insured did just that—paying some premiums directly to the carrier against orders—and correctly gifting some premiums to the trust. Mr. Turner’s estate believed that the premium payments made directly to the carrier were present interest gifts qualifying for the $10,000 annual gift tax exclusion ($13,000 in 2011). The IRS disagreed, claiming that the direct payments were gifts of future interest that were subject to the gift tax and ineligible for exclusion.  The court agreed with the estate, holding that, because the beneficiaries had an absolute right to demand withdrawals after each premium payment, the gift was a present interest gift that was eligible for the annual exclusion.  Despite the positive result for the taxpayer in the case, proper Crummey gifting is still an essential aspect of life insurance trust administration. Unless insureds are prepared for the expense of litigation, premiums should still be paid through the ILIT and Crummey letters should still be sent to beneficiaries.

For a complete discussion see Advisor’s Journal Tax Court Okays Crummy Crummey Powers

Can long-term care (LTC) annuities supplement or expand the LTC portion of your practice? LTC insurance is a powerful wealth-preserver for individuals who qualify and families that can afford it, but despite its value, LTC insurance can be a tough sell. Insurability issues can put LTC insurance out of reach for clients with health problems, and resistance to paying for an insurance product that may never pay off may keep your clients away from the table.

Enter LTC annuities—also referred to as hybrid annuities. As the name implies, the product functions like a deferred annuity, but offers an increased payout, typically equal to 200 or 300 percent of the face value of the annuity, if the annuitant needs LTC. Payments may continue for a fixed period, or, if an optional rider is purchased, payments for LTC can continue for the rest of the annuitant’s life. LTC annuities are purchased as are any deferred annuity, usually with a lump-sum premium of at least $50,000.

Read this complete analysis at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of LTC insurance in Advisor’s Journal, see LTC Insurance Reform Act of 2010 (CC 10-46).

For in-depth analysis of LTC insurance, see Advisor’s Main Library: C—Long Term Care.

Why is this Topic Important to Financial Professionals? The only certainties in this life are death and taxes. Right?  A brief discussion of the history of taxation on the American people is discussed in relation to the new reporting requirements surrounding the Patient Protection and Affordable Care Act.

As U.S. citizens ‘We the People’ are responsible and are supported by the fiscal decisions of our government.  In support of this ideal, taxes are levied to sustain, generally the operations of our society.  The States raised revenue in the early days, beginning with tobacco and whiskey. “But, financing the Revolutionary War was expensive and the young United States struggled to raise funds from the thirteen states:”[1] A tax on the States initiated with the Revolutionary War and the need to fund Washington’s Army.  In Congress January 2, 1779, it was resolved, that taxes would be collected in the amount of “fifteen millions of dollars in the year 1779, and of six millions of dollars annually for 18 years from and after the year 1779, as a fund for sinking the emissions and loans of these United States to the 31st day of December, 1778”[2]

“An income tax was first collected during the Civil War from 1862 to 1872.”  Again in 1894, under “the administration of President Grover Cleveland, the federal government again levied an income tax”.  “However, the Supreme Court ruled it unconstitutional the following year. Not until the Sixteenth Amendment was ratified in 1913 was Congress given the power ‘to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census of enumeration.’ ”[3]

Although the idea of taxes may not be novel in this country, notwithstanding, the share of America’s income collected by government has increased significantly.  “For example, in 1902 the Federal tax burden stood at 1.3 percent of Gross Domestic Product (GDP). A century later, the federal tax burden had risen nearly 20 fold [2000%], to 20.8 in the year 2000.”[4] Most pundits state that the tax burden must rise in the future to cover social insurance and other societal obligation.

“Prior to the enactment of the income tax, most citizens were able to pursue their private economic affairs without the direct knowledge of the government. Individuals earned their wages, businesses earned their profits, and wealth was accumulated and dispensed with little or no interaction with government entities. The income tax fundamentally changed this relationship, giving the government the right and the need to know about all manner of an individual or business’ economic life.[5]

The statements of the Department of the Treasury, above, are interesting taking into account the new legislation regarding 1099s and the reporting requirements surrounding the Patient Protection and Affordable Care Act, which basically audits any and all significant business transaction concerning U.S. taxpayers.

“In 1953 the Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS), following a reorganization of its function.  By 1959, the IRS had become the world’s largest accounting, collection, and forms-processing organization.[6] This year the Internal Revenue Service’s budget is estimated at approximately $13.5 billion.[7]

[2] Journals of the Continental Congress, 242.  Philadelphia.  Printed by John Dunlap.  1779.

[3] Library of Congress. “American Memory.”  Today in History: April 15. 

[4] United States Department of the Treasury.  “Education, FAQ: Taxes, Taxes and Society.”  Last Accessed 8/22/2010.   http://www.treas.gov/education/faq/taxes/history.shtml

[5] United States Department of the Treasury.  Fact Sheets.  “History of the U.S. Tax System.” Last Accessed 8/22/2010.  http://www.treas.gov/education/fact-sheets/taxes/ustax.shtml.

[6] Id.

[7] Budget of the United States Government, Fiscal Year 2011.  Office of Management and Budget.  Washington D.C. Page 115.

Can Gift-Splitting Go Wrong?

We are all aware of gift-splitting, and most of us have probably recommended that our clients double their annual gift tax exclusion amount by gift-splitting with their spouse. The rule is simple enough—a married couple can split a gift by one of the spouses so that each spouse is deemed to have gifted half—but there are intricacies to the rule that every advisor needs to be aware of.

Gift Splitting Review

Most gifts are subject to the gift tax, but a majority of people never pay gift tax, due to the $13,000 annual exclusion and $5 million lifetime exemption ($5,120,000 for 2012). Gift splitting allows a married couple to double their exclusions by making joint gifts to third parties for gift tax purposes. So, for example, if Father makes a lump sum $25,000 gift to son, the couple can elect to split the gift, and the entire gift will be free of gift tax under the $13,000 annual exclusion which is doubled to $26,000 for the couple.

George Mentz , Counselor of Law, Wealth Management Professor, AAFM ®

Throughout life, there is always a celebrated group of financial professionals who succeed while many others fail. It doesn’t matter if you’re working in M&A, or Asset Management, whether you’re a risk manager or a Wealth Advisor, the financial services sector is one of the most competitive industries on the planet and it can be divided into two distinct groups, the winners and the losers. The questions are what is it that separates those two groups and how do you get into the former and not the latter?

As an avid reader of success literature and research, I’ve learned there are many psychological, human potential, and even metaphysical strategies advocated to improve your performance or to reinvigorate your potential. The irony to life is that we will all need to grow, improve, and change our character and capabilities in just about any career that we engage in.

How to have a successful career

To begin this discussion, let us start with the premise that most great successful careers begin with three key ingredients: an idea, a desire and a plan.

A strong desire is usually what can bring your idea into a reality. So, if you began your idea with the strong purpose to succeed and never look back, you will be victorious if you maintain the persistence to continue through the inevitable cycles of growth.

Most of us begin our careers with some sort of plan of action to grow our careers. Some of us had very detailed plans and others did not. Planning is crucial because most people do not define what they’ll do and are too timid to write down exactly what they want to achieve as well as how they’ll realize the goal to any degree of specificity.

Thus, having definite objectives and a specific plan along with a strong desire for success is generally what is needed to accomplish great things and have a successful career in financial markets or any field for that matter.

How to be in the winners group

Here’s what you need to be a winner: – A burning desire – Be willing to take action on that desire – Create an action plan – Have Faith or Belief in your ability to make it happen – Break from the past and move forward with your objectives and desires – Focus attention and positive emotions almost exclusively on career goals and never give up •- Engage your stated objectives while maintaining positive thoughts, enthusiasm, and persistence that is built upon honesty and integrity

Doing all of this can and will propel your career to new heights and catapult you into the winners group.

How to create a plan that leads to a successful career

There are a number of methods of creating a plan that will clearly lay out what you want to achieve in your financial career. Here are some specific items to include in your plan: – Your career goals along with your desired title and salary – What service, time commitment, and value you will give to earn and deserve the outcome – How you will conduct and arrange your life and career to allow the calculated receipt of prosperity and compensation. – The date your career goal will be achieved. – Sign and date the written plan or contract with yourself – Read the plan daily upon beginning your workday and before retiring for the evening. – Frequently feel “in your minds eye” that you have achieved success in heart and mind and harvest that emotion of attainment. – Imagine what you will do with your success after you acquire success, and decide how it will help you and others. – Believe that the desire result or something better will materialize for you and be open to varying opportunities in relation to your goals.

Metaphysical Aspects of Success

Many professionals and athletes use this meditative visualization technique for a few minutes a day to reaffirm their personal faith and success mentality so that they will indeed accomplish what they desire. – Find a quiet spot to relax for a few minutes. – Read your plan or your written statements of desire (think about your personal objectives in you mind’s eye) – Practice forming mental images of your personal success in your spare time. – Project the image of your success on the subconscious mind using a heart felt emotion. See that you have success already in your imagination: For example, imagine yourself with a salary 5 times what it is today and feel the emotions of this reality and achieving that goal at year-end. We suggest that you do this daily. – Affirmations of reading aloud the professional and successful attributes that you desire such as: “I am a great (insert your profession, Investment Banker, Fund Manager, etc.) and deserve to have a great career. (or you could simply read your personal successful career plan frequently) – Cultivate gratitude and thankfulness of heart. In Contrast, complaining and being negative is a waste of everyone’s time and energy. – Be thankful … for your job, your career, your clients, your health and so forth. This will create an energy of attraction that will bring you more positive outcomes, happiness, and success. – Contemplate the good and the opportunities in your life while relaxing and having a sense of well-being. – Combine your successful career plan with action, action and more action.

Putting your successful career plan into action

– Your daily actions must be persistent. This means that we should be proactive in building new career opportunities while maintaining your current career. – Avoid lack of decision and procrastination, and stick with your choices and plan. An example of this would be to leave a bad job if is consistently sapping away your time and energy without any rewards. – Write down each day what you will do to move forward with your career. Be efficient and effective. Do all you can do each day without haste and don’t worry about yesterday or tomorrow. – Today, you should accomplish all you can “one thing at a time.” Over time, this adds up, and you will see positive results. – Strong thoughts of gratitude and enthusiasm will bring about change for the better in you and your environment. This simply means to focus on what you desire and on being the best. Contemplate thinking about the best for you, your family, and your career. – Organize your affairs so that you can receive the rewards of a better career. Thus, allow for promotions and raises. Believe that you deserve them. This may mean acquiring greater tools, administrative assistance, infrastructure use, and ways to capture income. This may entail learning about and offering a broader line of products or services. – In any event, be prepared to provide solutions and do the homework before asking for the raise or promotion. – Surround yourself with encouraging professional mentors or advisors who want to work efficiently and succeed. – Know in your heart that an outcome similar to what you expect or something even better will come to you at the right time. – Communicate, monitor, diagnose, improve, recommend, implement, and revisit to adjust your plan to stay on track toward your goals.

Successful financial professionals have mentors and support groups

– Develop a group of friends who can give you professional insight and feedback and will support your goals and share their own personal experiences and success tactics. – You should be willing to help all members in this group of professional friends with your knowledge, skill, and support. – Meet often for planning and to obtain and give feedback to your group. – You must always speak and act to maintain harmonious relations with this group with positive and encouraging conversation. Thus, never belittle or contradict your group members. Offer solutions and ideas, not criticism.

Believe in yourself

Believe that you are as good or, better, than anyone competing in your field. Know the details of your profession and be able to articulate the benefits of your service. Chances are that what you have to offer is as good as your competitor. Do not be afraid to go for the next position on your career ladder, because someone else will do this if you don’t.

Being Successful

In my career, I have helped thousands of professionals and customers, and taught over 200 college courses and professional seminars to students in over 50 countries. I have worked with the richest of the rich and feel great joy in contributing to or preserving anyone’s financial freedom. Moreover, I realize that many of you are already great successes and commend all of you for your diligence and expertise.

With success, there is usually hard work and many people who depend on you. Remember, there will be times when you just need to rest, relax, or take some time off. There will be seasons where you may need to rejuvenate your enthusiasm for your profession by becoming creative and innovative with your career choices.

Also, family and community should remain your priority. With all of that being said, your physical and mental well-being is the most important thing to maintain so that you may continue all of your good works as the successful financial professional you have or will become. Therefore, we must all try to preserve a balance of body, mind and spirit while incorporating exercise, diet, leisure, learning, and relaxation into our daily lives.

And finally, when all is said and done, success in its truest form is essentially a state of mind.

George Mentz , JD, MBA, CILS, MFP – International Lawyer, Wealth Management Professor, Founder of the AAFM American Academy of Financial Management ® . Mentz holds a Doctorate in Jurisprudence in International Law, an MBA, and various certifications and designations in finance. Mentz is an award winning professor and author based in the United States where he is a licensed attorney and notary public. Mentz and his company have assisted thousands of professionals worlwide with executive professional development and accredited education. Professor Mentz founded the CWM® Chartered Wealth Manager Program which includes thousands of professional certifeid members from Asia, India, Africa, Latin America, USA and the EU. In the United States, candidates can complete the accredited law school’s online LLM courses and assessment to achieve certification. http://llmprogram.tjsl.edu For other books and education, see National Underwriter