The President sent a bill to Congress proposing a plan to add six justices to the Supreme Court. The way his plan will work is that as each justice reaches age 70 ½ and fails to retire, a new justice will be added.
This was precipitated by the slew of recent Court rulings declaring his sponsored legislation unconstitutional. Presently there are nine justices with six over the age of 70 ½ so if the President’s proposal becomes law and none retire he will get to nominate all six immediately. Of course, the Senate will still have to confirm them, but given the present majority his party has, that would be a perfunctory procedure. The undeniable purpose is for more of his legislative initiatives to remain law, accomplish the President’s objectives, and to also back up some of his campaign promises. An added problem is that there might be an even number of justices making it harder for a majority decision in some cases.
In the Judiciary Act of 1869 Congress established that the United States Supreme Court would consist of the Chief Justice and eight associate justices. Since the U.S. Constitution does not define the size of the Supreme Court, the President avers that it is within Congress’ power to change the size to any number it so desires, and that fifteen is the appropriate number.
This has met with widespread opposition including many members of the President’s party. The President has taken his position to the media to present his case to the American public.
While there has been active, vocal and organized opposition the most recent Supreme Court decision affirmed a contested law by a 5-4 vote. The threat of the President’s proposal being enacted seems to have attributed to the unexpected shift in the decision by Justice Roberts who was fully expected to vote to overturn that law. Justice Roberts is known to work strongly to assert the independence of the Court and to keep it out of the theatre of political controversy.
The affirmative vote seems to have accomplished Justice Roberts’ objectives because it appears support for the President’s proposal is waning. In fact, the media is referring to Roberts’ vote as the “switch in time that saved nine.”
If the above was posted on April Fool’s Day it might seem like a plausible “trick;” however, everything above is exactly true, but it occurred in 1937. The President was Franklin Delano Roosevelt and the judge was Associate Justice Owen Roberts.
Happy April First!
Some recent events caused me to put these seven previous postings together to provide to a client. I am posting these here as today’s blog and while it is quite long it is a complete “kit” of how to provide for a family with young children should the main breadwinner have an untimely death. This should be given the highest priority. You are welcome to call me if you have any questions.
Last week I met two young mothers, one was 28 and the other 38. They both had two children. The 28 year old was married and she and her husband were in good health. The 38 year old was a widow. Her husband was in good health until he was diagnosed with a brain tumor and died seven months later. Her oldest son is named Jacob, age 9.
The 28 year old and her husband do not have a will and do not have life insurance. Neither did the 38 year old widow until her husband was diagnosed and they then had a will prepared, but he was not able to get life insurance. When he died his employer had a policy with $200,000 coverage that she received. After he died, she, Jacob and her younger daughter had to move out of their house into her parent’s house. She also received about $80,000 net from the sale of her home and $90,000 from her husband’s 401k account. She has a job and is able to continue working and with the Social Security payments for the two children and interest on her savings is able to manage. Her mother watches the children as she no longer can afford the sitter the children were sent to after school hours. She doesn’t have a clue how she will cover the children’s college education except from what might be left from the $370,000 she received. At least her husband had a will so the probate process was relatively easy and not costly. Since the husband was in his late 30s he was able to accumulate some home equity and 401k funds, and his boss covered him with some life insurance. If the wife also passed away untimely there would not have been adequate funds to provide for the guardian and the children as they grew up.
I told the 28 year old she and her husband need to get a will, if for no other reason than to name a guardian for their children if they both have an untimely death. I also told them they each should get a minimum of $1 million 30-year fixed premium term policy for about $120 a month total cost for both of them. Furthermore, they should provide in the will that the guardians should receive a fixed payment of $2,000 a month for the care of their two children and an interest free loan of up to $100,000 to build an addition on their home, if necessary for the care of their two children.
The 28 year old couple can make arrangements the best way they can in case the unspoken occurs. It is too late for Jacob’s mother.
Last week I wrote about Jacob’s mother who had to move out of her house when her husband died. I also wrote that she was left with $370,000 and that elicited some calls and e-mails questioning that she was not so bad off. Thus today’s follow up.
The woman’s 38 year old husband died – that is bad off regardless of amount of the money in her bank account. While she was able to marshal some funds, she did not have sufficient cash flow to continue living in her house. Had there been adequate life insurance she would have had the option of remaining or not. Without the insurance, she had no choice; and that is the purpose of life insurance.
I don’t know if she would have remained in her house, or purchased a less expensive house in the same area, but she had no choice. She knew she could not afford the monthly mortgage, real estate taxes and myriad payments required to maintain the house, so she moved as quickly as she was able. Also, by moving, her children had to go to different schools, leave friends and after school activities, and grow up without a father causing as big an upheaval in their lives as their mother’s.
Having an adequately funded plan with the suitable legal documents provides the survivor with an option to stay where they are or change. Without the right plans there is no choice, no decision or breathing room to get used to new circumstances. And God forbid if both parents would have been killed there would have been no will, no designation of guardians, no regular payments to the guardians and no fund for future financial comfort for the children. The 28 year old mentioned in the column had no arrangements, but hopefully by now her and her husband have sufficient life insurance and the proper documents.
The husband was 38, so pretty well established in his occupation with a job that provided life insurance as a benefit, able to accumulate some 401k funds, and also able to build some equity in their house after all selling and moving costs. They had no other savings but were managing comfortably on their two salaries. The wife is not destitute, but a widow with two children living with her parents, with concerns about future financial security and college funding for her children. This does not leave her in any type of enviable position. Anyone that thinks otherwise is just not in tune with how life works.
Recently, I have read about some tragic events happening to noble people that have been killed while performing their public service jobs. Some occurred through accidents and some were murdered by dastardly people. In response to news reports that include information that they left a young family with high mortgages and have little or no savings, people rush to contribute to special funds established to pay off the mortgage and create college funds for the children.
This is very honorable and admirable especially since the tragic circumstances of their deaths can only evoke sympathy by all of us who are indebted to these public servants and who also believe in fair play and decency.
However, I have a problem with the family being left destitute. Doesn’t the main breadwinner of the family have a responsibility to make sure this doesn’t occur if there should be an untimely death? I also apply these thoughts to any head of a family that would be left in a position where their family could not maintain the life style decided on when they were active and well.
There is an easy, low-cost way to protect the family from an unforeseen and untimely death and that is with fixed premium guaranteed term life insurance for a period of 20 to 30 years. The purpose of the insurance is to provide funds should the unmentionable occur. Bare-bones term insurance can be very inexpensive – for example $1 million coverage for a 30 year old is not more than $40 per month for 20 year coverage and $70 for 30 years; for a 40 year old $60 per month for 20 years and $100 for a 30 year policy. All of these are less than the cost of a meal in a nice restaurant. And, the family is protected.
Once taken, you should pray to God that you will be “wasting” your money and the benefits will never be paid. This adoption of family protection is a responsibility that cannot and should not be delegated – it is an individual responsibility and certainly very affordable for any family leader.
People associate estate planning with saving estate taxes, but in reality, very few pay estate taxes. However, there are many good reasons to plan, and here are ten of them.
- Execute a will. When you do not have a will, your affairs will be settled according to legislative and bureaucratic norms (usually never the full way the deceased would have chosen.) A will also allows the appointment of people to settle your affairs, and says whether they will be compensated or need to obtain surety bonds.
- Planning can provide for charitable bequests, delayed distributions to beneficiaries, different classes of beneficiaries and asset protection for your heirs. This can be done through a will, trusts or by the way assets are owned and beneficiaries designated.
- Probate is the process of settling an estate by proving the will, qualifying the executors, administering the estate, resolving all claims, accumulating and liquefying assets, filing all tax returns, paying taxes and making distributions to beneficiaries. In many cases, probate can be minimized by a careful titling of assets.
- Choosing a guardian can be easily done in a will, and done with much difficultly, confusion and cost in a Surrogates Court when there is no will. Choosing a guardian is necessary in the event of an untimely death of both parents of a minor child or children.
- Provisions can be made in a will or trust for an allowance or regular stipend to be paid to the guardian, and also to provide for funding for additions to the guardian’s home or to acquire a bigger home if needed for the appropriate care of your children. Without a will, needless costs will mount up each time the guardian needs additional amounts for the care of the children.
- An estate plan can provide for estate liquidity such as making funds available to heirs soon after death, providing for the management and operation of businesses or real estate, providing funds to a guardian or indicating a need for life insurance. Many times low cost fixed premium 20 and 30 year term life policies can solve potential problems.
- Planning enables the synchronization of non-probate assets such as IRA, 401k and 403b accounts, pension plans, annuities and jointly owned accounts or houses with assets individually owned. It is important to understand that many assets that people own are not distributed or covered by a will and care needs to be taken to consider the complete distribution of all of a deceased’s assets in accordance with what is desired.
- A plan enables the preparation of healthcare proxies, living wills, powers of attorney and provisions for care when incapacitated or disabled. In many instances determining who “pulls your plug” could be much more important to you than who gets your money.
- This is an appropriate time to prepare a letter providing the pertinent information you would want your family to have regarding your affairs, your background, ethical, moral and/or religious values and any other sage advice you want to leave behind.
- Planning forces the organization of information and your affairs. And, a final word is to leave a list somewhere with all your passwords so your family won’t go crazy trying to decipher your email accounts, your computer and cell phone.
Nothing beats being prepared. As seen from the above, planning is essential – even when there is no taxable estate.
One of the most important aspects of a will involving children is the need to appoint a guardian who will take care of the children in the event of the death of both parents. Following are some comments to help in the process of considering such a choice:
- The first step is for each parent to prepare a list of possible guardians with each candidate rated by their degree of responsibility, accessibility, geographic location, lifestyle, moral tenets, parenting views and personal compatibility with the children. Other factors to consider are the candidate’s ages, whether they have children, and the ages of their children.
- The parents should compare their lists to see if there are any guardians they both selected. Additionally, they should discuss every person on both lists. What occurs sometimes is that the discussion centers in on one person rather than all of the candidates on the lists. .
- Meetings and discussions with the potential candidates are essential before the final selection can be made. Parents should learn about the potential candidates’ willingness to become the children’s guardian, their projected short and long-range plans, and viewpoints on issues that are crucial to the parents.
- Guardians should be selected after satisfying all concerns and after serious discussions between the children’s parents. It would be wise to choose an alternate guardian or guardians should the primary guardian become unable to fulfill the assigned duties of caring for the children.
- Meetings with the selected guardians should be held on a periodic basis and should include the children. These sessions will provide a forum to elaborate on the current needs and plans for the children. The meetings will also permit the potential guardians to voice changes in their own lifestyle that might have a dramatic impact on the children. This may cause a change of the guardian based solely on indirect or unsaid impressions imparted and conveyed during these sessions. It would also give the potential guardians and the children opportunities to become familiar with each other.
- An instructional letter or memorandum should be prepared for the guardians if it becomes necessary for them to assume their duties. This letter or memorandum should be an updated list of important, helpful details in providing for the children’s well-being. The details should include the children’s favorite foods, allergies, medical requirements, family medical history, personality traits and behavior responses. Personal opinions should also be stated on areas of personal discretion including spending allowances, dating, education, driving and drinking.
- The will should specify which assets and the amount that should be placed in a trust with a trustee given the power to disburse them as required by the guardians for the care, maintenance, health, education and general well-being of the children. This trust will insure that essential assets needed to support the children can be used immediately without any court restrictions. This trust will expire at such time as pre-chosen by the parents in their will. An alternative to using the will would be a living trust.
- The children’s financial security and standard of living will be determined by the guardians, trustees and most importantly, by the parents’ planning. The parents must provide direction as to the spending of funds to achieve their desired short-range and long-range goals. The guardians and trustees need to be provided with instructions of which goals have priority. For instance, are short-range goals such as a car or a vacation in Europe more important than long-range goals such as a college education or a nest egg for a future profession, business or house?
- Day-to-day spending needs of the guardian can be provided for by establishing a monthly minimum allowance to pay the guardians. The parents should review the initial monthly amount periodically to see that it is still reasonable. Once the parents die, this amount will then be set. Afterwards, the trustee can be provided with the power to increase the monthly allowance to meet predetermined specified spending goals or to simply adjust for inflation.
- The monthly allowance will give the guardians the freedom to budget and plan their new responsibility without having to account to the trustee. In the event additional funds are required by the guardian, requests can be made to the trustee. Further, at that time, a discussion with someone knowledgeable or financially independent might be in order.
- The ability to maintain the monthly allowance is directly related to the liquid earning power of the remaining available assets. The parents should analyze the earnings and cash flow potential of the assets when drawing up their will in terms of after tax funds available for the guardian. An important consideration is that this earning power could sharply decline should the assets be substantially depleted to achieve a spending goal. Needless to say, much care should be used in projecting future cash flow as well as future budget requirements.
- In addition to the monthly allowance, the will or trust could specify which items of care the trust should disburse without question by the trustee. This might include lessons, schooling, certain trips, religious instruction, and private tutoring.
- If there are provisions for delayed distributions of the principal and interest to the children, the will or trust should state when distributions of income and principal is to be made as certain ages or stages are attained.
- The parents also have to designate the point when the monthly payments to the guardian would cease. I suggest they stop one year after the youngest child graduates college or the child is honorably discharged from the service, moves out of the guardian’s house or turns 24, whichever occurs first.
- I do not advise making the guardians the trustees. A trustee should have no interest in the funds other than to see that the parents’ wishes and desires for their children can be attained and will be followed.
Upon the death of both parents, a guardian for minor children will be appointed. Funds can be left to the children as described in the next blog. An additional provision can be included to provide the funds to be used for the children’s care by their guardian. As in this and all legal matters, an attorney should be consulted to draw up the documents.
Following is an illustration of how this can be done:
- The designated legal guardian of the children will receive a net after tax income of $3,000 [or any chosen amount] per month until the youngest child reaches age 21 and is not attending a four year college program; or if they are attending a four year college program or in the armed services, then until one year after they graduate, or are discharged from the service, or the child reaches age 24, whichever occurs earlier. There will be no accountability of these funds.
- The trustee will have the right to make interest free loans or mortgages to the guardian, if in trustee’s opinion, the purpose of the loan is to assure or provide for the comfort (to be defined as loosely or liberally as possible) of the person in fulfilling their responsibilities as guardian of the children. The loans could have a maximum principal stated such as $400,000, and can have a maximum term such as ten or 20 years, or one year after the guardianship ends.
- The trustee will also have the right to withdraw principal or income at their discretion to apply for the benefit of the children or guardian if in the trustee’s opinion such funds would benefit the children or the guardian’s care of the children.
Under state laws, children cannot own financial assets until they reach majority – usually on their 18th birthday. Also, many times people do not want to leave assets outright to children or others until they attain a more mature age… when they feel the children could better handle the funds. To delay the transfer of funds to a child, a trust needs to be established. As in this and all legal matters, an attorney should be consulted to draw up the documents.
Following, is an illustration of how funds could be left in a trust to a child or any other young beneficiary that will inherit funds.
- A separate trust should be established for each child. In lieu of separate trusts, there could possibly be one trust that is “subdivided” into sub-trusts for each beneficiary.
- At age 21, the child will get distributions equivalent to the trust income. Upon reaching their 25th birthday, they will receive 1/3 of the total accumulated funds set aside for that child. The full income on the remaining funds will accumulate and be added to the undistributed principal. At age 30, half of the remaining funds will be distributed to that child. The income on the remaining funds will be added to principal with the full remaining amount distributed to the child at age 35.
- To the extent, individual income taxes will have to be paid by a child on any income accumulated but not paid or distributed, there will be a distribution to cover the taxes. The amount distributed will be at the highest effective tax bracket the child is in for the year the income is taxed.
- The trustee will have the right to invade principal for ascertainable standards of health, education, and general well-being of the beneficiary.
- The trustee will have discretionary powers to make distributions for anything that the trustee believes will be in the child’s best interest.
The above is an example of the available choices. It does not consider special needs of the child such as medical, custodial care or special schooling.
We are at the dawn of the Gig Economy. This is where independent contractors perform services on an as needed basis. Examples are the people that work for Uber, Lyft and Airbnb.
This model is working because there is a paradigm shift by overhead laden companies toward using people that cause, and have, little or no overhead. Further many of the people performing the services are either out of work or underemployed and cost less than a fulltime employee. However, some of these people are highly skilled with the demand for their services fragmented but that are utilized globally creating steady work at premium prices. The Gig Economy also permits a better work-life balance for contractors that have choices.
The Gig Economy is enabling temporary assignments and short-term projects to replace full time positions. Digitization and the Cloud has created a mobile work force that can work almost anywhere. Starbucks, McDonald’s and public libraries have replaced many offices for those that want to get out of their house. Many businesses, particularly professional service firms, have eliminated offices and adopted a hoteling set up with work stations for those that need to be in the office in any given day.
The Gig Economy has created agility for a company where they can seek out and use specialists without having to either hope they have someone with those skills, train someone or add a permanent person that would only use those skills sporadically. Further the web has become a consolidator of worldwide outreach opportunities for user and contractor. Additionally, depending on time zone differences, work with tight deadlines can be turned around quickly – sometimes the next morning.
As a new business model there is great disruption in certain areas. Established taxi and hotel businesses are being displaced with free lancers and people renting their private homes. Newspapers, magazines and publications are releasing long-time staff writers and editors and replacing them with part-timers working on specific assignments. Graphic designers and illustrators are being engaged virtually on a project by project basis. Bookkeeping services and tax return preparation are also being doing globally. We all experienced customer care center personnel from all over the world some of whom work from home. In the “old days,” the piece worker model was popular. It seems it has been resurrected in the form of the Gig Economy.
There is a down side. The lack of a permanent and trained work force in some cases can affect quality. If I wrote this twenty years ago I would have included “loyal” after “permanent” but wide spread layoffs have destroyed much of the employer/employee tit for tat that breeds loyalty. Money saved in payroll costs offset some of the loss in production and quality but with the right oversight and management profits can still result. Systems and processes are stepping up to fill the gap. Contractors lose the security of a steady paycheck, and in many cases working gigs is not their first choice but it fills a great need for them.
The Gig Economy is new, but it is here and growing. How it develops remains to be seen, but for now, it seems to be taking hold.
This is a second article by Jim Lee from his “As I See It…” column and was coauthored with his wife Melanie Coffman. See my previous posting for his first article.
“My last “As I See It,” “Kicking and Screaming into the Fourth Quarter of Life” garnered more questions and comments than any previous column except “The Four Freedoms,” which I wrote shortly after 9/11. Based on the age of our readership it was not surprising that most of the questions had to do with “downsizing” and thus an appropriate place to start this column.
Melanie gets all the credit for developing the vision of downsizing. I was late to join the party as I was content to stand pat. However, she mapped out for me all of the advantages. The single most important advantage was to move closer to our daughter, Kristen and her husband. Before the move they were located over an hour away from us and now they are within 15 minutes.
We both strongly recommend that the parents move near the children and not the other way around. Why disrupt their lives? Second, I would be able to give up all of the maintenance and landscaping responsibilities (took up to 12 to 15 hours a week). Third, there appeared to be a very narrow window in the real estate market which had only slightly rebounded from the crash of 2008. Once the decision was made, our house was listed, and it sold within two days (That was a stroke of pure luck). One final point: We made these decisions at a point in our lives when we were still able to make all our own decisions.
Now, what to do with all of your stuff?
This was the most asked question. Think about it. We all accumulate a lifetime of stuff and all of that has memories attached. In our case, Melanie and I brought together many family heirlooms in the way of furniture passed down from parents and grandparents. We absolutely loved this stuff but were faced with parting with at least fifty percent of it. We made up a list and circulated it among our four children. Whatever they chose would be shipped to them at our expense. Hence 31 pieces of furniture wound up being shipped across the country. Now in everyone’s home there’s something we love seeing.
But what about those precious items you thought they might want, that were now our orphans? This is the first hard lesson of downsizing. We are often the bearer of the connections to these heirlooms. They have been in our families for generations. They were bestowed upon us and we cared for them lovingly. And yet, often our children don’t have the space, nor do they have the connection. It pains me to say this, but the reality is that the connection ends with you. Next stop: donate. Yes, I made over 37 trips to local resale shops before moving day. There were some pleasant surprises along the way. As an example: I was the third generation to inherit a set of tables made of hand carved mahogany in the early 1900s. My Grandmother Lee had ordered them from Malaysia to furnish her home in Panama when my Grandfather was there designing electrical systems that went into the construction of the Panama Canal. From my perspective they are beautiful antiques with a great personal story. Well, my sons couldn’t use them – however, Melanie’s daughter, Kristen, stepped up to cherish them. The cross-family save continues to warm my heart.
It is difficult but very important to grasp the fact that if your children don’t want an item the reality is that the connection ends with you.
What to do about your philatelic estate.
There were several clients who requested information along the lines of the handling of their philatelic estates. The deeper we get into the fourth quarter the questions of disposition of your collection looms large. During my 30 years in this business I have been witness to some very sad experiences when it comes to disposing of collections. As a result I have developed some practical points for you to ponder.
First, make sure your spouse understands the value of your philatelic holdings. They are an asset that will become part of your estate. Second, add a philatelic executor to your will and make sure that your spouse has met and is comfortable with the person appointed. Make sure that you have a clear understanding (in writing) as to how this person will be compensated for their time. Third, have a plan to move your collection to a place of safekeeping immediately upon your demise.
I cannot emphasize the first point enough. Unfortunately I have seen cases where the spouse had no idea as to value of the collection and a six figure collection was literally sold for pennies on the dollar.
If you have questions about your philatelic estate, I am always available to consult on this matter. There is no charge for this service and of course all discussions are held in strict confidence.
From our family to yours, both Melanie and I, wish you a joyous Holiday Season and a prosperous New Year.”
Jim Lee is a stamp dealer specializing in essays and proofs and he has a wonderful newsletter where this was originally written that can be accessed at http://www.jameslee.com. Essay and Proofs is an esoteric part of philately that has ardent followers. You can learn a little about them from Jim’s website. Check it out!
This was written by James E. Lee and is included here with his permission.
“While I was working on preparations for NY2016 this past year a secondary theme had been weaving its way through the back of my mind. How do I spend my time now that I have reached the fourth quarter of my life?
I will turn 68 in November of this year. The stamp business has been a major part of my life since September of 1972. There is still a considerable amount of enjoyment that comes from this passion of mine. However, there are many new and wonderful events that have occurred over the past four plus years that have caused me to reflect on the way I will spend my time going forward.
We were lovingly challenged by our daughter, Kristen, to focus on making memories as a family. Because of Kristen’s great idea, Melanie and I started taking stock long before NY2016 and developed a plan for our “fourth quarter.” It would put family in the first slot and everything else would follow. Some might think of it as a very active bucket list but we prefer to call it a plan for the next 20 years.
We set the stage by downsizing last year from a large single family home in Cary to a town house in Oak Brook, Illinois. This provides us with a low maintenance base of operation. It allows us to spend the winter months with our children and grandchildren in the Atlanta area. We also have easy access to both major Chicago airports to travel to places like Portland, Las Vegas (for restaurants and shows), and to all points in between.
Narrowing the business plan is also an important focus. In the past seven years our philatelic literature business has slowly been divested. This has returned to me a tremendous amount of time and space.
For the most part fancy cancels have just faded away. Postal history has been reduced to classic 19th century with emphasis on the American Civil War period. Essays and proofs are an ever increasing primary focus. In other words, I am left with the areas I truly enjoy. The business is now portable and can go where we go. But most importantly I can still achieve the same level of success that I have enjoyed over the years in half the time.
I plan to spend this last quarter with my family and doing the things that matter to us…family, travel, writing, and business. This is not a swan song but a repurposing of life. One never knows how many years remain so I don’t want to waste it or miss out on anything.
Enough time has been devoted over the years for the good of philately; society boards, ASDA, MSDA, and the like. It is time to pass the reins to the next generation of movers and shakers.
The swan song will not come until Boston 2026 where the booth will be run by Adam, Joel, our other children, and all of our grandchildren. It will be up to them to decide where it goes from there.
Continued good health is the key to all this and I am happy to say we will work hard at it.
Yes the “fourth quarter” is here, alive and well, but we are playing for double overtime.”
Jim Lee is a stamp dealer specializing in essays and proofs and he has a wonderful newsletter where this originally appeared. The newsletter can be accessed at www.jameslee.com. I am an occasional customer of his and make sure I buy enough so I can continue to receive his newsletter. NY2016 was a once every ten year international stamp show that was held in New York in May and June for nine days at the Javits Center. The next international show in the United States is scheduled for Boston in 2026.
Variable annuities, or single payment deferred annuities, provide a tax-sheltered mechanism that allows funds to grow without any tax payments until the income is actually withdrawn.
Variable annuities can be an appropriate investment where the need and intention is to accumulate as much of a capital base as possible to provide cash flow during retirement and possibly for the rest of the owner’s and, if requested, their spouse’s lives. Variable annuities can also include a death benefit for the original amount invested or some other amount. Variable annuities can be applicable for someone of limited means where a guaranteed cash flow is provided that they cannot outlive, as well as someone with a large portfolio that wants an anchor of a guaranteed cash flow and protection against asset decreases. Funds can be withdrawn as an annuity payable for the rest of the owner’s life, at varying amounts or percentages annually, or as a lump sum at any stage where there is a remaining balance. They are not liquid and are private contracts with an insurance company.
Variable annuities provide tax deferred asset accumulation. Income within the annuity is not taxed but is taxed as withdrawals are made. Upon a lump sum withdrawal all of the income will be taxed and possibly at higher rates since the income will consist of many years’ accumulation.
Some negatives of variable annuities is that the accumulation does not qualify for a step up in basis upon death, nor does it qualify for any type of tax-free rollover or stretched out withdrawal as an IRA would. This means that the entire income accumulation would definitely be taxed when withdrawn during life time or after the annuity owner’s death. If the funds are withdrawn before the owner attains age 59 ½, there is a 10% premature withdrawal penalty on any income. When funds are withdrawn part will be taxed and a part will be considered a tax free return of capital. Fees can be charged by the insurance company upon acquisition of the annuity, upon liquidation, or when withdrawals are made in excess or certain predefined amounts or percentages of the asset accumulation. All provisions are stated in the annuity contract.
An annuity is an insurance contract and as such is eligible for a Section 1035 tax free rollover into another similar insurance contract should that occasion arise. While variable annuities are not federally insured they are insured to certain limits by your state’s insurance guaranty fund. When investing, consider keeping the investment and eventual accumulation below those limits.
Variable annuities permit choices of underlying investments that could be for income, growth or a combination of the two. Regardless of the type of investments, all income would be taxed at ordinary rates – there are no capital gains or dividend rates. Furthermore there is no ability to contribute the annuity to a charity during lifetime and get a full deduction while avoiding the capital gains tax on the appreciation. If a charity is the beneficiary upon death, then the income taxes will be avoided.
For those using an investment manager, an advantage of a variable annuity is that it removes those funds from the assets under management pool subject to annual fees. There could be a fee when the annuity is purchased, but it is a onetime payment while the management fees are paid annually.
Variable annuities are complicated and need a thorough understanding of what they are, the benefits and costs and how they fit into an overall investment plan. Use this blog as a brief introduction.
I felt worse than miserable and terrible. March 9, 2009 was the market meltdown’s low point with the Dow Jones Industrial Average at 6507.
Actually the way I felt was on March 4th. The evening before my wife asked me how we were doing in the market, and I suggested we sit down the next morning and go over everything. That morning I printed out every account statement we had and then reviewed it all with her.
I looked over everything before I sat down with my wife and felt like the bottom dropped out. My financial assets were half of what they were at the beginning of 2008. I spent my entire life accumulating funds for my late in life financial security and saw half of it vanish in the last year. I was totally numb. All my foregone spending, entertainment and traveling were meaningless.
I had a diversified portfolio weighted heavier in stocks. Of course they dropped, but in the whole scheme of things they were stocks and there was no guarantee against that happening. I am a big boy and understood that. For the previous five months as the market dropped, I was struck with an overwhelming feeling of inaction, so I did nothing. I stopped putting new money in the market, but continued my dividend reinvestments – that was on auto pilot and I was literally frozen in decision making.
Looking at the bond portion of my portfolio was more devastating giving me a feeling of despair that I did not have with the stocks. The bonds were “conservative” investments, supposed to be an anchor, stable, and income producing and many bonds dropped 60% or more in value. That wasn’t supposed to happen. With stocks – it had to be somewhat expected, maybe not so much, but still expected in the recesses of my brain. But bonds? Totally not expected!
Luckily my inaction paid off since I sold nothing and the market recovered and the bonds lived to continue paying interest and eventually their face when they came due.
A lesson here is to not count on anything except perhaps 100% government insured bonds or bank certificates of deposits; and even with that you cannot count on a guaranteed cash flow except at very low rates. Unexpected things can happen and dreams can be destroyed. What you need to do is understand the markets, what your cash flow needs are and what can occur that can cause losses or diminution of the cash flow. What you also need to do is determine which is more important – asset values or cash flow? And build a portfolio that can give you the best chance of attaining your goals – and also hold something back in liquid cash – I call that a rainy day fund. If you do not feel fully confident doing it by yourself, then find an advisor you can completely trust and seek their guidance. After your decisions are made you then need to regularly monitor what you have, hope you made the right choices and act to minimize mistakes. And also do not panic!