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Taxable Asset - Annuitization Sales Script

Mr. and Mrs. Sample, we recently had a conversation about your $100,000 C.D. You have concluded that you are not likely to ever need these funds and intend to leave it to your children.

I suggested to you that there are other financial strategies; we should examine to see if we could substantially increase the current and future value of this asset to your heirs. I want to present a proposal that will illustrate a simple, safe, and sensible way that will 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 $100,000.

(2)

The cost basis is the same.

(3)

The rate of return is 6%. Assume no future change.

(4)

The after tax rate of return is 4.32%.

(5)

Your income tax rate is 28%. Assume no future change.

(6)

Your heirs' income tax rate could be as much as 39.6%. Let's assume 31%.

(7)

Assume that the future value of your taxable estate

will 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 into the future performance of the asset based on our assumptions.

One year from now, the CD will have grown to $106,000. (Column 1). The gain is $6,000. If the income tax on the gain has not yet been paid and the inheritance occurred, the estate would owe $1,860 in taxes and the heirs would receive a net amount of $104,140 (Column 7).

If the inheritance occurs 10 years from now, the net would be $152,379.

Our plan here today Mr. and Mrs. Sample is to examine an alternate way to put this $100,000 to work to dramatically increase its value now and in the future for your children.

III.

Here are the actions we need to take to do this:

(1)

Use the CD to purchase a $100,000 immediate annuity.
(2)

The immediate annuity will pay to you $8,000 per year guaranteed for as long as either of you are living.
(3)

Pay tax on the $8,000 annual income of $984.
(4)

Purchase a last survivor life insurance policy and pay the annual premium of $7,016. The face amount of the life policy is $467,733.

To keep the $467,733 from being included in your estate, you should consider making your children the owners and beneficiaries of the policy. The simple way to do this is to make an annual gift to them of $7,016 and let them pay the premium. You can also consider having an irrevocable insurance trust to which you make the annual gift to pay the premium.

Keep in mind that the $8,000 annual payment comes to you and you have no obligation to pay premiums nor to make gifts in the future.

IV.

Now let's examine the results of redirecting the current value of your CD and compare the difference.

The red boxes represent the value of your CD in years 1, 5, 10, 15, 20 shown in (Column 7) of page 1 of the illustration. The blue boxes represent the death benefit from the life insurance policy.

Mr. and Mrs. Sample, one of you would have to live to be just over 105 years old for the red box to equal the blue box. 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?

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