The Advantages of Each Type of Fixed Index Annuity Funding |Weekly Wednesday Wisdom Webinars

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers retirement and estate planning questions every Wednesday at 1pm.

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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

 

 

 

On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers the below questions.

  • Saw an article about caregivers and elder abuse. Is this because as people are not able to take care of themselves and don’t have a POA, the judge has to appoint someone? Now a stranger is managing the finances? How do we protect against this?
  • I want to create a lifetime of income for a beneficiary upon death, how would I go about doing that?
  • FIA(Fixed Index Annuity) can be funded with qualified or non-qualified funds, the advantages of each type of funding?
  • After you create an FIA can you later convert some of it to IUL(Indexed Universal Life)?
  • Is there any one time payment for long-term life insurance?
  • If I have a $300,000 Universal Life Policy that gets converted to paying for long-term care, and the long-term care cost exceed the original $300,000 life insurance policy will the long-term care payments continued to be payed by the life insurance policy?
  • I have an LLC (Limited Liability Company), is there a way to saving taxes from LLC income?
  • I heard that trust income reaches maximum tax rates at about 11,000 per year, is it better to allow a beneficiary ability to use income at an early age like 18, and then set up to receive principal at 25, 30, 35?

 

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Episode Transcript

If you via email and if you have questions or something’s unclear as I’m going through please feel free to put it in the question and answer or the chat section. I’ll try to get that answer and with that, I will share my screen and we’re live. All right so we do this every week and two questions ahead and I always start with a positive focus. I almost forgot that how could I forget a positive focus. My son Ryan who’s in boy scouts is going away on his first camping trip without mom or dad. So it’s he’s gonna be gone for six days which is pretty crazy to think about. So pretty excited for him and should have a good time. All right so we had two questions submitted ahead of time and if you do have questions pardon me feel free to put them into the question and answer section. And the first question saw an article about caregivers and elder abuse is this because people are not able to take care of themselves and don’t have a POA and the judge appoints someone. Now a stranger is managing the finances so how do we protect against this. So this is a common question and it’s something that as I kind of its almost part of the long-term care discussion. We’re living longer than ever and sometimes the body is doing better than the mind and so whether it’s dementia just the failures of aging we might need some assistance. 

So there’s a couple of different I guess scenarios, where this comes into play one, is you’ve done no planning. So no rule book right and what I mean is you don’t have a trust which can manage your affairs while you’re alive as well as upon death. You don’t have a durable power of attorney. We typically just call it to simplify things financial power of attorney. So you don’t have a financial power of attorney you don’t have a trust and now you get a knock in your head you suffer from dementia just old age you can’t manage your affairs anymore. So what would happen sorry so what would happen is someone would have to basically go to court for you and this is called probate and we can have probate. While upon death that’s the one that most people are familiar with but we can also have probate. While you’re alive and we call this living probate and the technical term of this is either a guardianship to make decisions with regards to your care and if you have less than I think it’s a hundred thousand dollars. That would be through guardianship and then also if you do have money then the courts would appoint a conservator I’m spelling that wrong but a conservatorship or a conservator. And who are these people well it could be family but a lot of times if you’re at this point or it could be friends? But if you’re at this point then what’s going to happen is typically the court’s going to appoint one and typically it’s going to be an attorney. And so this is where there have been some cases even in Michigan where the person the court has appointed has taken advantage of the senior and there should be checks and balances there but it does happen whether it’s fraud or just taking advantage of that person. So that would be one way that we get into a guardianship conservatorship. 

Where now someone’s managing the finances is that if you don’t have your own rule book you don’t have a financial power of attorney. This is a document where you appoint someone to make financial decisions for you likewise a trust if we have assets owned by the trust whoever you appoint as a successor trustee could manage the assets and the trust. So again we most people want to avoid this living probate where first of all it’s monitored by the court. So that’s a big pain in the butt but then especially if we get down to court-appointed guardians and conservators. I’m not saying it’s common by any means but there have been circumstances where someone’s kind of defrauded a guardian or conservator so that’s kind of one situation. Excuse me another situation would be where we’re suffering from dementia Alzheimer’s just kind of starting to make poor choices and someone can kind of get in there and kind of plant ideas in your head or make you do something kind of silly with your money. We’ve seen this I’ve seen this in my practice where I had an individual very intelligent he was an engineer. I ended up getting defrauded by individuals in Haiti. Where he was sending them gift cards like hundreds of thousands of dollars worth of gift cards. He would argue that it was a good investment at the time but the family any reasonable person would say that it wasn’t a good investment. So the interesting thing with a financial power of attorney is that it doesn’t take away someone’s individual to me or someone’s ability to make their own poor individual decisions. So understand that a financial power of attorney doesn’t take away your ability to make poor choices but that’s where a trust can. So in that situation what we did is we set up an asset protection trust because it was concerned family is concerned about long-term care costs but also we set it up in such a way that he was not the trustee. We had someone else managing it. So even though he was technically the beneficiary he wasn’t managing the assets and trust and kind of think of a trust like a piggy bank or suitcase. 

Typically you would set up the trust you would be managing the assets you could take the assets out but in this situation, we set up the trust and we just had another family member managing it. So I guess getting back to the original question. How do we protect against this there’s no perfect magic wand answer. But what I would suggest is by creating a rulebook, okay having a well-drafted estate plan whoops where we map out who’s going to make decisions. If you’re unable to and having the right people. We could have the best legal plan in the world and if you’ve appointed your son or daughter as your successive trustee or power of attorney and they’re a horrible person god forbid then even a well-drafted estate plan isn’t going to protect against that. So it’s really dependent on the people who are surrounding you but it’s you’re gonna be in a much better position if you do have that estate plan. All right so hopefully that was helpful all right so let’s see a couple of questions coming in here. All right let’s do the second question I have listed here what’s this question.

I heard that trust income reaches maximum tax rates okay we’ll talk about that one in a second. All right so let’s knock off this second question that was submitted ahead of time I want to create a lifetime of income for a beneficiary upon death. How would I go about doing that there’s different ways to do it again getting back to the kind of through the legal channels. What we would probably want to do is create a trust and instead of upon death just going outright to that individual that pillowcase of money approach. Instead, we would hold it in trust for their benefit. We call this a separate shared trust or legacy inheritance trust. And so this trust or safety deposit box or trust for the beneficiary we could build certain rules around it. So we could say that income maybe just the income that comes out of this and the principal remains. We could say you know what maybe four percent per year comes out of this or I’ve had families say this isn’t answering the question like 10 per year for 10 years the idea. Is that it’s basically liquidated over a period of time but if we’re looking at creating a lifetime of income then we can just direct the trustee to do one of these things and maybe direct it okay four percent a year comes out now taking it one step further. What we also could do is look at upon death what we could do is get what’s called a single premium immediate annuity based on the beneficiary’s life and think of this as almost like a kind of social security.

You pay money in for your lifetime and then at a certain point. You flip a switch and now it becomes annuitized and so we could do a single premium immediate annuity that based on the insurance company and the age of the individual the insurance company will guarantee a certain amount of income per year or per month for life. Obviously the younger the individual the lower the amounts the older the individual the higher the amount would be. So we could do it from a legal perspective and just leave the trustee up leave it up to the trustee to decide how to invest to get to that point or if you really truly want a guaranteed lifetime income then you would look at a single premium immediate annuity. Which is basically similar to say social security or pension. It’s just taking a lump sum of cash and turning it in into an income stream for life. So hopefully that was helpful. Any questions on that nope okay. So I just had two questions submitted. Let’s do this one from Ed. So the third question here FIAs can be funded with qualified or non-qualified funds advantages of each type of funding IUOs. I presume can only be funded with non-qualified funds as proceeds are tax-free okay. So we’re talking about a couple two different investment tools.

We’re talking about a fixed index annuity and an index universal life insurance. They’re similar but different a big thing with IUL is there is this life insurance component to it. And a lot of times we’re using this life insurance piece because it qualifies what we call 7702 and the tax code where we can if we wanted to we can create tax-free income and there are some other things that go along with IUL. It can be tax-free income we can get a death benefit out of it that’s larger than what we put in so some people use it for legacy also long-term care that death benefit could double as a long-term care benefit. And then we have fixed index annuities these are this is typically so I talked about a single premium immediate annuity that’s kind of the standard when people think of annuity, they think of lifetime income that’s what the single premium annuity is. Fixed index annuities can be geared towards different things but typically the key components are we want our money to grow and we don’t want to lose what we put into it. This also has those components as well that’s what the I part index fix index universal life or fix index annuity they both offer growth and safety. So the question was where do we invest in these and so we have to define what’s a qualified account would be things like an IRA 401k 43b Roth all of these have a certain tax qualification. That’s why we call these qualified accounts some of these are pre-tax Roth IRA would be post-tax and it grows tax-free. 

So the fixed index annuity can be invested in either qualified and then we also have what we call non-qualified. These don’t have any type of kind of tax qualification to them just by the nature of the accounts. So this would be like your checking account your savings your money market brokerage accounts and interestingly technically IUL which grows tax-free has to be funded out of a non-qualified account qualified accounts and also we could have a new fixed index annuity over here as well. Qualified accounts cannot hold IUL but they can hold fixed index annuities. So we could put a fixed index annuity inside of a traditional IRA we could put a fixed index annuity inside of a ross but a lot of times people have a lot of pre-tax dollars. So the way that we fund the IUL if we were to do it is to pull the money out of the IRA. Pay the tax move it into checking savings and then from there we would pay the premium on the IUL.

So that I presume can only be funded with non-qualified funds and proceeds. And then again the big thing about the IUL by its nature is that its growth is tax-free. We can have a fixed index annuity that grows tax-free but it would have to be inside of a Roth so and not everyone can do Roth. So that’s why a lot of people look at IUL’s as kind of rich man’s Roths. Okay, so I answered that question. After you create a FIA can you later convert some of it to IUL? Yeah so let’s say you put in 500 000 to a fixed index annuity and then let’s say a number of years it grows. Okay, you wouldn’t do it like right away because one of the trade-offs with these are sometimes it takes some time. We wouldn’t want to move into a fixed index annuity or IUL right away or excuse me move into it and then pull all the money out right away. Like that would be a mistake but let’s say we do a fixed index annuity and then actually there’s a sorry I got something stuck in my throat one sec. All right sorry about that so let’s say we funded a fixed index annuity one of the things we can do is take out 10 a year without any penalty. So that’d be 50 000 coming out each year and then that could be used to fund the premium for the index universal life. So after you create a FIA can you later convert some of it to IUL the answer is yes. We just have to make sure that we fit the plan together correctly and again that’s why we always figure out okay what are the goals. What’s the best strategy to help you achieve the goals and then put together the right tools. 

Is there any one-time payment for long-term life insurance the answer is yeah. Yeah so technically with IUL we funded over typically a period of five years but we could do a one-time payment to say like a fixed index annuity or we could do a one-time payment to the IUL. And what they have is a portion of it is sitting in a fixed account that might earn two percent and that two percent then funds the cash value life insurance. So technically no there isn’t really a good well technically yes. We can do a one-time payment for long-term or permanent life insurance let me clear off these questions. If I have a three hundred thousand dollar universal life policy that gets converted to paying for long-term care and the long-term care costs exceed the original 300 000 life insurance policy with a long-term payment. Long-term care payments continue to be paid by the life insurance policy. So what we’re talking about here is we have so let’s I don’t know let’s say we put in three hundred thousand dollars and I’m oversimplifying things. Let’s say that gets turned into seven hundred thousand dollars worth of death benefit or long-term care. 

So you’re either gonna need the death benefit or long-term care benefit or some combination of both. So the question asked is what happens if we use up all of this for long-term care does the long-term care benefit continue the answer depends on the type of policy the way the policy is structured. What we would have to do to get that long-term care benefit to continue would add on a continuation of benefits option to that long-term care. So if long-term care is our number one concern then typically we would add on this continuation of benefits option and I apologize we use a ton of acronyms. Like I’m looking at this COBB what’s COBB but again it’s I’m kind of doing this on the fly. So it’s a continuation of benefits so if the policy says that it’s going to pay out say 5 000 per month and we’ve exhausted all of that at that 500 000 per month. If we added when we set up the policy this continuation benefits then this 5000 would be unlimited as long as you were alive now the death benefit would go away because you’ve used up that bucket. So hopefully that was clear FIAs generally don’t have fees do IULs.

So you’re right to fix index annuities there are no fees to them no cost versus variable annuities. There are annuities that do have fees likewise no fees for a single premium immediate annuity IUL’s don’t have fees per se but they do have expenses because that IUL there has to be some type of life insurance component to it. So you’re going to have a mortality expense right so that mortality expense that’s really what your death benefit is depending on how the policy is set up that death benefit or mortality expense goes to fund the death benefit and then also any long-term care benefits. So deciding whether we want to fix index annuity or IUL whichever like which one’s better neither is better. They’re both tools it’s just what are your goals let’s pick the right strategy and then pick the right tools they’re just similar yet different. So every situation is a little bit different but fixed index annuities don’t have any fees or expenses tied to them typically IUL will have mortality expense tied to it but that’s going to fund the death benefit and long-term care benefit I assume you’re asked okay. And all right let’s see another question is there where. So the question is have an LLC. Is their way to saving taxes from LLC income. Well, I’m not a CPA we have a CPA with us. I don’t have any magic wand answers just other than taking business deductions. Looking at what other things you have going on. So the question is you have LLC income is there a way to save I don’t have any magic bond answer other than we’ll take a look at your tax return and see if there are any opportunities there. So okay I heard that trust income reaches maximum tax rates at about 11 000 per year. So we’re talking about trust income 11 000 per year is it better to allow a beneficiary ability to use income at an early age like 18 and then set up to receive principal at 25 30 35 okay. So upon death, what happens and the concern is trust income because the way it works is once a trust gets over 12 500 dollars if I’m not mistaken of income then you’re at the top 37 tax bracket versus a married couple. You have to get over 600 000 of income to get to the 37 tax bracket so with that most of our trusts do not keep the income inside of the trust. 

So upon death, we kind of have different ways to handle things but kind of the old way was to say that everything goes the income goes out to the individual, and then the principal would go out at 25 30 35 with the idea that we’re protecting against the poor mismanagement of the child. So yeah we would almost always have the income coming out and the principal would be held healthy but the concern with this is what happens if they get a divorce at age 36 half that money could be gone. What happens if they pass away at age 36 all that money could be gone. So a lot of times what we’re doing is we’re saying you know what let’s keep it in trust and then at and then at maybe age 30 now they can step in and manage their trust. Where if they want to they can open up the trust and take the principal and then come out but they’re not forced to because by saying 25 30 35. You’re just launching a pillowcase of money and then if they get divorced at 36 half that money could be gone versus here we’re giving them an opportunity for a lifetime of asset protection. But either way, the trust income because we want to avoid this we almost always have the income coming out or if not coming out at least taxed on their own personal income tax rate versus trust at a tax rate. So doing things like a k-1 out of the trust. So it shows that they have the income but if we wanted to keep their income in we could they would just have phantom income that they would have to pay tax on or we could take the income out to pay the tax. So that was good okay all right any other questions? Let me just see check the chat check the question and answer. I think I answered everything all right well I appreciate it I always really enjoy these. I love the questions that come in thank you. Yes, you’re welcome thank you all right. With that make it a great week, take care, bye-bye. 

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