Never Out Live Your Money Presented by Beneflex Financial Group Inc. Jerry W. Hill In Cooperation with Richard Olive, Executive Vice-President National Community Foundation Neither the Speaker nor National Community Foundation provides legal, tax or financial advise. The Speaker does not represent any Investment or Insurance product or Company. Consult your tax advisor about your specific situation. The “Facts” of Life The IRS allows us the opportunity to decide who will receive our estate . . . however, we must choose 2 of the following: FAMILY IRS CHARITY The “Facts” of Life Most Americans Choose: Family IRS -Each get about half- Why? People are either ill-informed or unprepared The following are a few examples of how estates can diminish without wise planning. Marilyn Monroe Gross Estate Settlement Costs Net Estate Shrinkage $819,176 448,750 370,426 55% Elvis Presley Gross Estate $10,165,434 Settlement Costs 7,374,635 Net Estate 2,790,799 Shrinkage 73% J. D. Rockefeller Gross Estate $26,905,182 Settlement Costs 17,124,988 Net Estate 16,192,908 Shrinkage 64% Social Capital Choices Who Decides? Government You Taxes Local University Museums/Arts Charity/Ecology Taxpayer Issues Federal Income Tax 10% - 35% TX State Income Tax 0% Capital Gain Tax 5% - 15% “Death Tax” “Death Tax” on certain assets -IRAs, Retirement $ -Annuities -Savings Bonds Double Taxation -Estate Tax -Income Tax A Solution Very Conservative Planning Guaranteed, Fixed Lifetime Income(s) Substantial Tax Deductions IRS Approved since 1917 Not Insurance The Only Annuity with a Tax Deduction By exchanging real estate, stocks, bonds, or cash for an annuity with a tax deduction, you can reduce your tax liability and receive a tax-favored income that can never be outlived. Equity Indexed Annuities Are HOT! The Annuity Exchange is HOTTER! Solution Transfer an Equity Indexed Annuity to An annuity with a Tax Deduction •Payable for lifetime •Payable for a specified period of years Transfer an Equity Indexed Annuity to an Annuity with a Tax Deduction! WHY? Annuity issued at accumulation value, not surrender value Guaranteed fixed income/Pay-out increases with a flex option Immediate tax deduction Flexibility; annuity payments can begin now or at future date Annuity Fact According to LIMRA, in 2000 there were $190 Billion in Tax Deferred Annuities issued and 90% of all people who own Tax Deferred Annuities die without ever annuitizing. Annuity Exchange Example $107,000 Accumulated value with a 10% surrender fee : Benefits for annuitant Annual Payout Tax Deduction •Lifetime payout flex deferred for 5 years $7,233 $44,091 •Period Certain for 20 years flex deferred for 5 years $7,242 $54,826 Real Estate Property Transfer True Story “We exchanged our farm for a lifetime income and saved thousands of dollars in taxes!” Howard and Charlotte Barnett, Farmers - Crawford, Indiana Now Retired - Homestead Florida Howard and Charlotte Barnett were farmers in Crawford, Indiana, for 42 years. The value of their land had increased from $43,000 in 1959 to $1,000,000 in 2000. If they sold the farm, the IRS could take $190,000 in taxes, leaving them $810,000. Jerry W. Hill Beneflex Financial Group, Inc. 11811 East Fwy. Suite 545 Houston, TX 77029-1950 (713) 455-7087 Exchange Real Estate – Guaranteed Lifetime or Period Certain Income – Capital Gain Tax reduction – Income Tax Deduction – Generally, removes asset from estate – NCF handles real estate fee and closing costs Problematic Real Assets Rental Property –Insurance &Taxes –Repairs –Tax on income –Tenant concerns Farms – Unable to take care of property – Taxes and Insurance – Upkeep (labor) – Many want to remain on farm and pass it to heirs Problematic Real Assets Raw Land –Taxes and Insurance –Not income producing –Maintenance & upkeep Second Homes – Taxes and Insurance – Annual maintenance – Lifestyle changes – Tenant concerns Two Major Concerns • Capital Gains Tax – 5% - 25% • Real Estate Selling Fees – 6% - 10% – 11% - 35% Loss in value Three Choices • SELL – 100K less tax/fees = 82.7K • KEEP - Problems stay intact • Exchange - $100,000 for – Tax favored lifetime income – Income tax deduction – Eliminate up-front capital gain – Control from the grave Example Current Info Property owners husband and wife age 70 $100,000 FMV Property $25,000 Cost Basis Results Annual joint lifetime income $5,430 Income tax deduction $34,577 (34.5%) Capital gain eliminated $25,933 Effective pay-out rate 6.6% Example (continued) • up front savings – No out of pocket capital gain tax – NCF absorbs all real estate fees – Tax deduction lowers reportable income by up to 30% Choices Most clients believe there are 2 alternatives KEEP or SELL There is a 3rd choice Exchange Real Estate For a lifetime or period certain income CD Exchange Program Many Bank CD’s are earning less than 3% and the interest is fully taxable. •A large number of clients over age 65 use the interest to supplement their income. CD Example Typical $100,000 CD Interest Rate 2.5% $ 2,500 Taxes @ 25% Tax Bracket $ 625 Total Net Income $1,875* *Principal remains in estate CGA Example Solution: $32,000 CGA Payout Rate 6.5%, (age 70) $ 2,080 Taxes @ 25% Tax Bracket $ 203* Total Net Income $1,877 * 61% of income is tax free return of principal, 39% taxed @ 25% CD Exchange Program The Difference •Client net income increased from $1,875 (from Bank CD) to $3,152 (income from $32,000 CGA and $68,000 Bank CD) •61% of CGA income is a tax free return of principal •Client receives a current $11,724 tax deduction, which may save $2,931 in taxes* * Assumes 25% tax bracket CD vs. Gift Annuity $100,00 $32,000 CD CGA Annual Payout Rate 2.5% 6.5% Annual Income $2,500 $2,080 Estimated Taxes $625 $203* Income Tax Deduction -0- $11,724 Total Net Income $1,875 $1,877 * 61% of income is tax free return of principal, 39% taxed @ 25% CD Exchange Program Summary •Income increased by $1,277 per year •May save $2,931 in taxes •Asset was removed from estate and avoided probate •Rate locked in for life •No set-up or legal fees Securities Exchange Program Fund your Annuity with Securities Charitable Planned Giving Countless individuals have stock and bond portfolios that have significantly increased in value or have lost value over the past few years. Many of these individuals are hesitant in selling because of the capital gains tax, or because of difficulties in accepting a loss. Stock Exchange Example Typical $100,000 Stock Portfolio Dividend Rate 1.5% $ 1,500 Taxes @ 25% Tax Bracket $ 375 Total Net Income $1,125* *Principal remains in estate Stock vs. CGA Stock CGA Annual Payout Rate 1.5% 6.5% Annual Income $1,500 $6,500 Estimated Taxes $375 $650* Income Tax Deduction -0- $35,936 Total Net Income $1,125 $5,850 * 60% of income is tax free return of principal, 40% taxed @ 25% CGA Example Tax Treatment of CGA Income Tax Free Return of Principal $1,950 Taxed as ordinary income $2,600 Taxed at capital gain rate $1,950 * Total Income $6,500 * Based on a $50,000 cost basis CGA Example Example: Exchange $100,000 Stock Portfolio for an annuity with a tax deduction Payout Rate 6.5%, (age 70) $ 6,500 Tax Deduction $35,936 Capital Gain Reduction $19,415* * Based on a $50,000 cost basis Summary •Securities were exchanged for a taxfavored annual income of $6,500 payable for life. •Transaction created a $35,936 income tax deduction saving thousands in taxes. • No capital gains tax due at the time of transaction.