move ira to trust via variable annuity

[Guest john cablet]

I have recently heard the as yet vague idea that a large IRA account holder could use a variable annuity to get money out of his estate w/o paying a lot in income tax. Apparently the annuity is set up to create a low basis for the purpose of making the IRA withdraw. Anyone have a take or experience with this mechanism?

[John Olsen]

John,

If money in an IRA account is moved to a variable annuity, that annuity must, itself, be IRA-qualified - else, the move is a DISTRIBUTION.

The "basis", on which Minimum Required Distributions is based is the account balance as of 12/31 of the year preceding the distribution year in question.

I can't think of what the "low basis" would refer to, unless - just possibly - the idea you heard about concerns ANNUITIZING the IRA and gifting the after-tax proceeds to an Irrevocable Life Insurance Trust, which then buys life insurance on the estate owner. The effect of that procedure (which I refer to as an "end run around the estate tax" or "the IRD Rescue Kit") can produce more net wealth tranferred to heirs. And there MAY be some income tax savings, to the extent that the annuitized IRA distributions may be taxed at a lower marginal rate than would have applied to a lump sum distribution to the IRA owner or to beneficiaries. But you could get the same effect by making WITHDRAWALS from the account, rather than ANNUITIZING it. The chief reason for the latter is to provide a GUARANTEED income stream as a source for the gifts-cum ILIT insurance premiums.

Could you get some more particulars on the idea you've heard about?

------------------

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[Guest john cablet]

I'm sure you have seen many versions of this. This method required the move of untainted (pure SEP; no contributions) IRA funde to a self-employed plan, where the purchase of a variable annuity would occur over the span of a few years. Since the value in the account would be low from the purchase of insurance, the recommendation was to move the asset to an irrevocable trust, paying a one time income tax for future estate and income tax savings. Presumably the annuity growth is exempt from income tax, according to the promoter. I'm not sure. Of course there is a real loss in value on the investment initially, which represents another transaction cost, which has not been identified by the promoter.

[John Olsen]

John,

It seems to me that there are two "threads" here. On the one hand, the client is moving SEP money to a Keogh plan. So far, I understand it. But you go on to say "where the purchase of a variable annuity would occur over the span of a few years. Since the value in the account would be low from the purchase of insurance".

I do not understand that at all. What's the point to purchasing the variable annuity "over a span of years"? It's all qualified money (GOT to be), right? Why not purchase the VA in a lump sum - assuming that a VA makes sense. Frankly, I'd question that point. WHY the VA in the first place? But, assuming there's a good reason for changing the investment "wrapper" of this qualified money from whatever it's in now to a VA, I still don't understand why the VA should be purchased in installments. Where's the benefit?

That said, what does "Since the value in the account would be low from the purchase of insurance" mean? Almost ALL variable annuities assess no front-end sales charge, so why would there be less money in it after the purchase?

As to the second "thread", I THINK I might know what's being suggested. There's a technique (which has been around forever, I think) which I call an "end run around double taxation" or, sometimes, "the IRA Rescue Kit". It simply illustrates that, if one liquidates an IRA or qualified plan (either in a lump sum or in installments. I MUCH prefer the latter), pays the tax, and gifts the net to an Irrevocable Life Insurance Trust, which then buys life insurance on the estate owner/plan participant/trustor, the NET WEALTH TRANSFERRED TO HEIRS can often be significantly greater than if no changes were made, and the QP or IRA asset were subjected to BOTH the Estate Tax AND Income Tax (IRD).

It works very well, much of the time. Sometimes, it doesn't work at all. You gotta crunch the numbers.

If that's what is being proposed, I can understand it. But I am mystified as to how a variable annuity enters into that strategy at all.

Could you supply any particulars as the proposal?

------------------

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[Guest john cablet]

Is your question, Why aren't they promoting the bigger bang, a highly leveraged outright purchase of life insurance? I don't know. Maybe this is a milder approach designed to appeal to more conservative souls. Why purchase in installments? I don't know. There would probably be less money because of a high commission designed to help the IRA holder achieve a low basis. This is the proverbial win-win situation ;-) the higher the commission, the more you help the client achieve low basis for transferring out the money. Since you are very well versed in this stuff, I would be very interested in any sources that you might know of that explain good plans, shams & ideas in process, either over the net of in book form.

Many thanks.

[John Olsen]

John,

Obviously, I've done a rotten job of communicating. I DO NOT UNDERSTAND THE USE OF THE TERM "LOW BASIS" HERE. Moving IRA money to an annuity has ZERO effect on the owner's basis.

What's the POINT to buying the annuity at ALL, much less in installments? That is not clear (to me, at least).

Can you get specifics of what is being proposed? Because what's being described simply MAKES NO SENSE.

------------------

John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818