Annuity Arbitrage

Client Profile

Age: 70 to 85 and insurable. The strategy can be effective with clients younger than 70 and older than 85, however, the “arbitrage” may be reduced.

Concern: Needs more after-tax income and/or wants to increase family inheritance.

Suitable Assets: Assets that can be sold with little or no capital gains tax consequences; for example, CDs or bonds or existing deferred annuities that can be converted to a single premium immediate annuity (SPIA).

Tax Status: Works best at highest income and estate tax brackets.

Other: Individual should have other signifi cant sources of liquidity since this strategy consumes liquidity.

This strategy may assist an older client in achieving both income and/or wealth transfer goals by selling assets and reinvesting the proceeds in a SPIA. The client retains some (or none) of the SPIA income and gifts the balance after taxes to an ILIT to pay premiums on a life insurance policy for the benefi t of the heirs.

Benefits

• Increases annual income: The after-tax, afterpremium cash fl ow can be higher than the net income from the existing assets.

• Guarantees annual income for life: The client will never outlive the SPIA income.

• Make current gifts to family members: Clients with suffi cient annual exclusions could gift some of the increased income to family members.

• Increases estate benefi ts to family: Life insurance can generate an attractive benefi t to heirs.

• Reduces estate tax: Life insurance is owned outside the estate. Proceeds pass to heirs free of
income and estate tax. Current Proposed CD SPIA Net to Heirs Net to Heirs ILIT $1,000,000 @ 4%
x (1-.35) = $26,000 Income $500,000 = $81,234 income beginning year 2 + $47,656 gift $1,000,000 $1,000,000.