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Deferred Annuity - Systematic Withdrawals Sales Script

Mr. and Mrs. Sample, we recently had a conversation about the deferred annuity you purchased 4 years ago. The current value is $250,000, funds that you have concluded not likely to be needed and your intentions are to leave this asset to your children.

I suggested to you during that conversation that there are financial strategies which can substantially increase the current and future value of this asset to your heirs. I have a proposal that will illustrate a simple, safe and sensible way to accomplish that.

In the first section of the proposal there are some assumptions that we need to agree on:

I.

(1)

The current value is $250,000.

(2)

The cost basis, your investment, is $175,000.

(3)

The rate of return is 8%.

(4)

Your income tax rate is 28%.

(5)

When your family inherits this asset, they will be taxed

on the gain as ordinary income. Their tax rate,

under current law, could reach 39.6%. Let's assume 31%.

(6)

Let's assume that the future value of your taxable estate

does not exceed the exemption and will not be taxed.

May we proceed based on these assumptions?

II.

The second part of this illustration is a look at the future performance of this asset based on our assumptions.

One year from now, the annuity value will be $270,000. (Column 1)

The cost basis will still be $175,000, the gain, $95,000. Inheritors would owe $37,620 in income taxes, leaving a net $232,380. (Column 7)

If the inheritance occurs 10 years from now, the net would be $395,298.

Twenty years from now, the net is $773,105. Now you see why we assumed an heirs' income tax rate of 39.6%.

If, over the next 20 years, your taxable estate grew to exceed the exemption, the estate tax would reduce $773,105 to less than $500,000 - not quite half the annuity value you left. The IRS would get more than your children would.

Deferred annuities are a good strategy to accumulate funds for future retirement income. Deferring taxes on the annual gains until the future need, then only paying taxes on the gains that represent part of your annual income allows you to spread out the taxes on the gains over your lifetime.

If you, Mr. and Mrs. Sample, however, have come to realize that you will not need income from the annuity and intend to leave it for your children, the tax advantages of deferred annuity become problematic. Deferred annuities are not good wealth transfer vehicles. The total gain at transfer would become ordinary income to the recipient.

III.

Here are some actions you can take to increase its value to your heirs and eliminate income tax possible estate tax.

(1)

Start a withdrawal strategy assuming the 8% future rate of return we discussed earlier and an original withdrawal of $18,518.
(2)

Leave a balance of $231,482.
(3)

Continue to annually withdraw assumed 8% earnings rate. The withdrawal will be the same dollar amount of the first year, $18,518.
(4)

Pay $5,185 in taxes on the withdrawal.
(5)

Purchase a last survivor life insurance policy for an annual premium of $13,333, which is the after tax net of the withdrawal.

To keep the $888,866 benefit out of your estate, you should consider making your children the owner of the life policy. The simple way to do this is to make a $13,333 gift annually to them and let them pay the premium. You can also consider an irrevocable insurance trust to own the policy and make annual gifts to the trust to pay the premium.

Keep in mind that the annual withdrawal is your money and you have no obligation to pay premiums nor to make gifts in the future.

IV.

Now let us examine the results of redirecting the future growth of your deferred annuity and compare the difference.

The red boxes represent the future value of your annuity to your heirs in its present form years 1, 5, 10, 15, 20 shown in Column 7, page 1 of the illustration.

The blue boxes represent the death benefit from the life insurance policy plus the balance left in the annuity after taxes.

This strategy leaves you with 92% of the same liquid asset you have now and stopped the deferred tax liability on the future growth. You have, in effect, traded the future growth of the annuity for $888,866 death benefit - free of income or estate tax for your heirs.

At the top of the blue boxes is the rate of return on the premium dollars relative to the death benefit. These rates are net of income tax. The $13,333 annual premium outlay would have had to earn those rates of return every year up through the year shown to equal the death benefit.

Mr. and Mrs. Sample, when you ultimately inherit the proverbial pine box, your children can inherit either the red box or the blue box. Which do you prefer to leave them?

	(c) 2009 CatMark, Inc.