What is an Annuity?

A contract between you and an insurance company.

Purchased through: – A one-time, lump-sum payment, or – A series of on-going payments over time.

Can provide regular, periodic payments for income.

Amount invested depends on: – Short and long-term financial goals – Composition of current portfolio – Tax situation.

Investment grows tax-deferred.

No limits on the amount you can invest.

Avoids probate.

Creditor proof.

– Phillip Wasserman, Lakewood Ranch, FL.

Rating Services in Insurance

Ratings Services

Insurance companies are among the most closely monitored business entities in the United States. Most active insurers are scrutinized by ratings services such as Weiss, Standard & Poors, Fitch, and the premier insurance rating company, A.M. Best. Companies like A.M. Best do more than simply make sure the company is meeting the minimum standards for regulatory clearance. Most ratings services are measuring the amount that the insurance company actually EXCEEDS the minimum requirements. This additional monitoring level cannot be overstated. Nobody thinks twice when a consumer asks, “What is that insurance company rated?” In fact, most agents don’t wait for the question to be asked. They often offer the current company ratings to the client because it is assumed that they expect to receive this type of information. Why? Because the insurance industry is safe and measurable to a high degree. Now think carefully; when was the last time you asked, “What is my bank rated?” or how about, “I wonder what the credit rating of my local stock broker is?”

Reducing Capital Gains Tax and Estate Tax

Two Trusts That Can Help

By: Wasserman, Phillip Sarasota, FL

How would you like to lower your capital gains and estate taxes at the same time? Yes, it can be done through a charitable remainder trust (CRT) or a private annuity trust (PAT). Setting up either of these trusts will allow you to reduce your estate taxes. But hardly anyone knows that depending upon which you choose, you will also be able to defer paying capital gains taxes on highly appreciated assets — such as real estate and stocks — or avoid paying them altogether. With the CRT, you make an irrevocable gift of assets (such as appreciated securities, real estate, or cash) to a trust. For the remainder of your life, you (or a party you designate) receive the investment income from the assets held within the trust. Upon your death, the principal value of the assets is transferred to your designated beneficiary, which must be a recognized non-profit organization.

People typically shy away from the CRT because while the donors receive income for life, the “donated” asset gets left behind to charity, which disinherits heirs. To solve this problem, many people who do set up a CRT “sweep” some of the income off the income stream and use it to pay for a life insurance policy that replaces the amount of the donated asset tax-free upon their death. There are a number of benefits to setting up a CRT, but the three major reasons pertain to reduced taxation. First, you won’t pay any capital gains tax on the appreciated assets in the trust, making CRTs ideal for assets with a low cost basis but high appreciated value, such as real estate. Second of all, contributions to a CRT are considered charitable contributions, so they qualify for an income tax deduction (and any deduction not taken in the year of contribution can be carried forward for the next five years). And third, the value of the assets held in a CRT trust is considered “outside of your estate” by the Internal Revenue Service (IRS), meaning it’s excluded from the calculation of your estate taxes. This could reduce your estate tax rate by as much as 46 cents of every dollar, given current estate tax rates.

To summarize the workings of a CRT, when including life insurance as part of the plan, the donor: 1.) avoids capital gains tax when donating the asset and selling it; 2.) gets income for life from the CRT, which has its own tax breaks given the donation of the asset itself; 3.) removes the asset from the estate, which would lower the estate tax, if there is any; and lastly, 4.) replaces the donated asset tax-free to heirs through the life insurance policy.

It’s really not a bad deal, and it is something that certainly should at least be considered by those who are planning to sell highly appreciated assets and have lots of taxes awaiting them.A PAT is another type of trust that’s similar to a CRT. With a PAT, you transfer the desired assets into the trust, the assets are then sold, and the proceeds are used to purchase an annuity. As with a CRT, the assets held in a PAT are excluded when calculating your estate taxes. But part of each payment you receive from the PAT will contain a portion of the capital gains which were due on sale. So while a CRT eliminates the capital gains tax, the PAT spreads them out over the rest of your life.

This latter point may make the PAT less desirable than the CRT. Yet some people consider the PAT a better option because over time, the investor and the investor’s family receive all proceeds from the sale of the asset. Thus, if you create a PAT, upon your death the asset will be removed from your estate and your heirs will receive whatever portion of the asset remains, free of estate taxes, gift taxes, generation-skipping taxes, and transfer taxes. However, your heirs will have to pay any remaining capital gains tax due.

How much income can you receive from a CRT or PAT? That depends. With a CRT, for example, your income will be based on the amount of income your assets generate while inside the CRT, as well as the “payout percentage,” or the size of the payments you choose to receive. The IRS requires CRTs to distribute a minimum of 5 % of the net fair market value of its assets annually. If you don’t need income from the CRT in one year, you can defer it through a “makeup provision,” but the CRT’s net distributions must eventually equal 5%. This means that you don’t have to start taking income right away. In some cases, if you defer taking the income, you can potentially take more income out later than if you would have taken the distributions in the first place. One caveat here: The higher the payout percentage, the lower your charitable income tax deduction will be, so you’ll want to talk to an advisor about striking the right balance
between the two.

I would strongly urge anyone considering a CRT or PAT to speak with a qualified estate planning attorney. Although the concepts as presented here are somewhat simple, the complexity of the taxation, along with one’s estate and income requirements, all need to be well factored into the decision making process. This is not run of the mill type planning, and it definitely takes an experienced individual to assist you.

That said, don’t be shy. A CRT or a PAT can be an excellent choice in helping you reduce taxes, create lifetime income and of most importance to some — leaving a legacy behind.

Too Much Tax!

Have you ever had the paranormal experience of holding a mutual fund that went down in value, only to discover that you somehow wound up owing taxes on it? As strange as it sounds, it could happen. How and why it happens is beyond the scope of this preview, but the bottom line is sad but true — when investing in a managed mutual fund, you have virtually no control of the taxes you pay while holding the fund.

If someone is interested in reducing tax, one of the first things they should ask themselves is whether or not they are investing in managed mutual funds outside an IRA. Investing in managed funds outside an IRA could result in taxable consequences that are beyond your control. As a result, paying taxes each year on a fund only reduces your return and that’s certainly not an efficient way to invest.

How much tax does your fund cause? Your tax return should give you a good idea as to how much tax you’re paying on your funds. Another way of checking out the taxable consequences of holding a fund(s) is to investigate something called “turnover” and is a good place to research this.

“Turnover” simply means “the amount of times a year the fund manager replaces the portfolio with a different set of stocks.” If the fund manager changes the portfolio once a year, that’s a 100% turnover. If the fund manager changes the portfolio two times a year, that’s a 200% turnover, if the manager changes half the portfolio that’s a 50% turnover, etc., etc.. Each time the fund manager “turns over” a portfolio that usually leads to one thing: paying tax, and in some cases, too much tax.

Certainly, there are some funds out there that are more tax efficient than others, but as far as I’m concerned, the simplest way to reduce taxes on managed mutual funds is to invest in the indexes instead.

Remember: an index is a “passive” investment. There is no one trading stocks within the index and given there are typically few trades (if any) done within the index, there is often zero “turnover” that would cause taxable events from taking place. Investing in the indexes often puts you in control of when you pay the tax, not a fund manager out there making those decisions for you.

Phillip R.