Using Technology to Help a Couple Plan Their Financial Legacy (Part Three of Three)

July 21, 2014

Our final installment of our three-part blog series focusing on a hypothetical couple, John and Theresa.

As we know, they had planned to retire at age 62 (in our first blog), and were forced to restructure their retirement income sources (including electing to partially annuitize their deferred annuity) due to the impact of the 2008 financial crisis on their business (as discussed in our second blog).

The recently retired couple now wants to look at some financial legacy planning options with a focus on their deferred annuity (i.e., the portion of their annuity that was not partially annuitized). Their advisor, Charlie, meets with the couple and runs the Pacific Life Tax Deferal Analyzer with the assumptions that Theresa dies at age 95, and John dies at age 90. Charlie further assumes that Theresa continues the non-annuitized annuity contract via spousal continuation at John’s death to avoid income tax at that time.

As we can see from the Pacific Life Tax Deferral Analyzer tool results, the non-annuitized portion of the annuity has a hypothetical cash value of approximately $2,752,922 at Theresa’s death.

 


Charlie further assumes the children did not need to worry about any estate tax owed at their mom’s death because the estate was well below the lifetime exemption ($5.34 million based on current rules). Here’s a breakdown of the assumed assets left to each child:
 

Estate Assets First Child Second Child Third Child
Real Estate $300,000 $300,000 $300,000
Inherited IRAs $75,000 $75,000 $75,000
Brokerage Account $245,000 $245,000 $245,000
Deferred Annuity $917,000 $917,000 $917,000
Total

$1,537,000

$1,537,000

$1,537,000

As you can see, the deferred annuity represents a sizable portion of the children’s inheritance. Much like the inherited IRAs created for each child, the deferred annuity death benefit also can be “stretched” over each child’s life expectancy. Here’s a summary of the deferred annuity payout options available and assumed to be selected by the children at their mom’s death:
 

Annuity Payout Option Selected First Child Second Child Third Child
Lump Sum     X
Five-Year Distribution      
Annuitization      
Nonqualified Stretch X X  

Charlie showed John and Theresa that they might be able to leave a financial legacy for their children by leaving them assets that can benefit from some tax deferral even after their deaths (because the children are only required to take nonqualified stretch life expectancy payments from the annuity). Here, we assumed two children chose to stretch the payments and one child needed immediate access to cash so he took a lump-sum taxable distribution. Because these are death distributions, the children also will avoid any 10% federal tax associated with the annuity distributions (based on current rules).

As we end our three-part blog series, we saw Charlie use the Pacific Life Tax Deferral Analyzer tool to help this couple navigate various stages of retirement planning including accumulation, income, and financial legacy planning. The advisor helped his clients visualize an annuity strategy that resulted in taking advantage of some tax deferral strategies, supplementing retirement income, and leaving a financial legacy for loved ones.

Read Part One

Read Part Two


Attachments/Links:


The purpose of the Pacific Life Tax Deferral Analyzer is to provide an estimate of the potential growth individuals may receive with a tax-deferred annuity versus a taxable investment. The methodology used is approximate, intended for educational purposes, and not meant as a predictive or forecasting tool.

The projections of information generated by the Pacific Life Tax Deferral Analyzer regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The results and explanations generated by this calculator vary due to user input and assumptions. The Pacific Life Tax Deferral Analyzer output does not incorporate the impact of any specific federal or state tax other than an assumed tax rate and net investment income tax when elected.

These results do not take into consideration state taxes and any applicable premium taxes. Actual tax rates may vary for different taxpayers and assets from the results shown (for example, capital gains and qualified dividend income). Actual investment performance also will vary. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the results shown. Investors should consider personal retirement objectives and income tax brackets, both current and anticipated, when making an investment decision. Hypothetical returns are not guaranteed and do not represent performance of any particular investment.

Pacific Life Tax Deferral Analyzer is not a comprehensive financial plan or strategy, and it should not be the sole means of determining such a plan or strategy. Results may vary over time based on changes to your input and the tool’s underlying assumptions.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

BlueRush is an independent third-party that is not affiliated with Pacific Life.

Annuities are long-term contracts designed for retirement. The value of variable investment options will fluctuate and, when redeemed, may be worth more or less than the original cost. Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply. Withdrawals will reduce the contract value and the value of death benefits, and also may reduce the value of any optional benefits.

IRAs and qualified plans—such as 401(k)s and 403(b)s—are already tax-deferred. Therefore, a deferred annuity should be used only to fund an IRA or qualified plan to benefit from the annuity’s features other than tax deferral. These include lifetime income, and death benefit options, and the ability to transfer among investment options without sales or withdrawal charges.

Variable insurance products are distributed by Pacific Select Distributors, Inc. (member of FINRA & SIPC), a subsidiary of Pacific Life Insurance Company and an affiliate of Pacific Life & Annuity Company (Newport Beach, CA), and are available through licensed third-party broker/dealers. Variable and fixed products are available through licensed third-party broker/dealers.

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Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

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Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency