Below is our case study of the month. This month's topic is how contract reviews can benefit your clients. Written by Luke Rother.
Client
Mrs. Rogers is a 77-year-old HNW client of a partner firm. The firm contacted us to review an annuity contract that Mrs. Rogers purchased in 2011. The client and her husband went through a liquidity event from the sale of a business several years ago. They have substantial liquid assets and a full income plan for the remainder of their retirement.
Situation
Mrs. Rogers initially purchased the Prudential annuity from a different advisor in 2011. She purchased the contract with an income rider to provide guaranteed income in retirement. She no longer needs the annuity for guaranteed income and the cost of the contract is very high because of the income rider.
Assessment
The benefits of her current contract are that she has received tax-deferred growth on the asset. Because of the high cost of the contract, we discussed if it would be worth looking at various options to repurpose the contract so that it aligns with her current goals to minimize taxes and fees.
We discussed the options as far as keeping the contract first. The first option is to keep the contract as is and never turn on income. The contract would continue to grow, and a death benefit would be passed on to the next generation. The problem is the rider cost would put a drag on the growth of the contract, making it inefficient. If she determined to use it for income to supplement her existing income, it would increase her income-tax burden.
In conversation with Mrs. Rogers and her advisor, we determined that she has a worry surrounding long-term care. While she and her husband have plenty of assets to ‘self-fund’ the cost, she likes the idea of having a plan for where to begin when paying for LTC.
Solution
We were able to do a 1035 exchange from the current annuity to an annuity contract with an LTC focus. This accomplished several things:
We increased the cost basis without incurring a taxable event which increased her guaranteed death benefit.
The contract will pay a monthly benefit if she qualifies for long-term care services. This payment is tax-free.
The contract has a guaranteed interest payment protecting the value from dips in the market. It has a lower potential for growth than the old contract, but the main goal for Mrs. Rogers is not growth, but protection.
Result
By reviewing her existing contract, we were able to identify some unexpressed concern (LTC) with her and her advisor. Mrs. Rogers was able to turn a ‘nuisance asset’ into a tax-advantaged asset that will enhance her overall financial plan.
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