My wife and I have inherited two variable annuities...

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My wife and I have inherited two variable annuities...

Postby Otops » Fri Jul 26, 2013 3:21 am

Hello everybody,

I've been reading in this forum since April of this year and have thoroughly enjoyed the guidance and knowledge you all offer. Having said that, I've finally whipped up enough courage to ask a personal question.

As the subject implies, three years ago my wife and I inherited two John Hancock Variable Annuities after her mother passed away. During the grieving process neither her nor I wanted to make any of the monetary decisions we were facing. So we deferred to her mother's financial adviser and followed his advice (even though he rubbed both of us the wrong way). In an effort to make a long story short, I'm beginning to question his advice.

So... I've listed the basic information for both annuities below and a few questions below that.

Annuity A -- 135,331.88
------------
Total Gross Investment: $108,222.31
Tax Cost Basis: $73,093.19

Withdrawal Overview
Total Withdrawals YTD (Gross): $3,107.47
Total Withdrawals Since Inception (Gross): $5,896.70
Free Amount: $0.00
Full Surrender Charge: $0.00
Cash Surrender Value (Minus Administrative Fee): $134,233.04

Systematic Withdrawal Program
Frequency: Annually
Next Withdrawal: 01/01/2014
Annual Payout Amount: $3,107.47
Total Gross Withdrawal: $0.00
Payout Option: Systematic Withdrawal Program - Stretch Distribution Only
Life Expectancy Factor: 37.8

Annuity B -- 37,702.88
------------
Total Gross Investment: $28,378.88

Withdrawal Overview
Total Withdrawals YTD (Gross): $849.15
Total Withdrawals Since Inception (Gross): $1,571.33
Free Amount: Not Available

Full Surrender Charge: Not Available
Cash Surrender Value (Minus Administrative Fee): Not Available

Systematic Withdrawal Program
Frequency: Annually
Next Withdrawal: 01/01/2014
Annual Payout Amount: $849.15
Total Gross Withdrawal: $0.00
Payout Option: Systematic Withdrawal Program - Stretch Distribution Only
Life Expectancy Factor: 36.9

ABOUT US: Married (46, 35), two kids (8, 6), HH INCOME of roughly 75,000, have a decent emergency fund, no debt with the exception of the mortgage (151,000) but we want to pay the mortgage off ASAP

QUESTION 1: Can both/either of these annuities be cashed out? If yes, we would like to pay down a huge chunk of the mortgage with the funds acquired.

QUESTION 2: Can annuity A and/or B be transferred from John Hancock and reinvested into a Vanguard variable annuity?

QUESTION 3: Should I stop thinking about it and just leave the annuities alone?


Any advice or help would be greatly appreciated.

Thank you and hope to hear from you!
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Re: My wife and I have inherited two variable annuities...

Postby synergy » Fri Jul 26, 2013 8:21 am

While each insurance company and each product has their own specific conditions, I can tell you my experience. My wife's mom left us a similar annuity with Sun Life. We were able to cash it out and split the proceeds between her and her brother. We moved the cash to Vanguard as part of our taxable portfolio. It has been convenient to have control and to have everything in one place.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Fri Jul 26, 2013 8:31 am

You say your wife and you inherited. I assume you mean your wife inherited?

Are these in IRA's or not?
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Re: My wife and I have inherited two variable annuities...

Postby Ryebrook » Fri Jul 26, 2013 9:10 am

I don't know if this is an option to you at this point or not, but I was in a similar situation last year with a couple of inherited John Hancock annuities from my deceased Mother.

I was able to convert them to an Inherited IRA at Vanguard, avoiding any taxable events. I now make annual distributions based on my life expectancy, which allows the money to grow as much as possible on a tax deferred basis.

My mother passed away at the age of 63, and had not yet begun taking distributions from the accounts. These and other factors will play into what you are able to do with the accounts. If you are able to transfer them to an Inherited IRA, be sure to set it up in your Wife's mother's name with your Wife as beneficiary. It is worth doing some homework on the IRS website in regards to rules with Inherited IRAs as well.

Best of luck with everything.
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Re: My wife and I have inherited two variable annuities...

Postby gwrvmd » Fri Jul 26, 2013 11:11 am

Vanguard has an annuity section, generally only sells SPIA (Single Premium Immediate Annuity) but they are very knowledgeable on annuities in general. They are on salary not commission, give good advise, there is such a thing as a section 1035 conversion that is not a taxable event. I don't know much about them but the Vanguard annuity advisors do. I would consider it probably the most non biased opinion you are going to get. Give them a call and compare their advise with anything else you get....Gordon
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Fri Jul 26, 2013 11:34 am

Thank you all for the responses!

@Synergy: I have not yet explored cashing it out but I'm assuming we would be hit left, right and center with taxes. Then again, distributions have already begun so it might not even be able to be cashed out. My mother-in-law was 78. I would like to move it into a more friendly and controllable environment.

@dickenjb: You are correct. Technically my wife inherited them. As far as I can tell they are not in IRAs. The statements read VENTURE ANNUITY and nothing mentions anything about an IRA. The funds are invested in five and three different mutual funds, respectively.

@Ryebrook: We would like to have the option of converting them into inherited IRAs with Vanguard. Is there a simple answer to the question: Where did you begin in that process? Being that distributions have already begun, I wonder if that will change our scenario.

@gwrvmd: I'm going to call a Vanguard Annuity Advisor. Having said that, my ultimate goal, I think, is to get out of these annuity nightmares altogether.

Thank you all again.
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Re: My wife and I have inherited two variable annuities...

Postby Retread » Fri Jul 26, 2013 12:00 pm

Otops wrote:You are correct. Technically my wife inherited them.

Not just technically - your wife inherited them.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Fri Jul 26, 2013 12:49 pm

True. However, in our marriage, we look at it a little differently I guess. What's hers is mine and what's mine is hers. But in the eyes of the government it is pretty cut-and-dry.
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Re: My wife and I have inherited two variable annuities...

Postby Ryebrook » Fri Jul 26, 2013 3:13 pm

Otops wrote:Thank you all for the responses!

@Synergy: I have not yet explored cashing it out but I'm assuming we would be hit left, right and center with taxes. Then again, distributions have already begun so it might not even be able to be cashed out. My mother-in-law was 78. I would like to move it into a more friendly and controllable environment.

@dickenjb: You are correct. Technically my wife inherited them. As far as I can tell they are not in IRAs. The statements read VENTURE ANNUITY and nothing mentions anything about an IRA. The funds are invested in five and three different mutual funds, respectively.

@Ryebrook: We would like to have the option of converting them into inherited IRAs with Vanguard. Is there a simple answer to the question: Where did you begin in that process? Being that distributions have already begun, I wonder if that will change our scenario.

@gwrvmd: I'm going to call a Vanguard Annuity Advisor. Having said that, my ultimate goal, I think, is to get out of these annuity nightmares altogether.

Thank you all again.


In my case, I started with a call to Vanguard to set up an Inherited IRA account. I then conferenced my Vanguard account rep into a conversation with John Hancock to get the transfers started. There is paperwork to fill out to close out the JH accounts, and also to start the transfer from JH to Vanguard. It is not an easy process, primarily because not all of the reps for either company know all of the rules regarding these types of transfers. Below are the rules (from IRS Pub 590) on these situations. On my JH account statements, one of the annuities was a 403(b) and one was an IRA. I was able to transfer both to Vanguard into an Inherited IRA.
--------------------------
Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.
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Re: My wife and I have inherited two variable annuities...

Postby MN Finance » Fri Jul 26, 2013 8:33 pm

Since they aren't IRAs the money needs to stay in an annuity to avoid taxes. Should you withdraw, everything above the basis is taxable (taxable money coming out first). It may be fine to take it all out if the additional taxes doesn't push you to the next bracket (since you'll eventually have to take it out anyway.) Not many companies will offer new inherited annuity contracts rolled over from somewhere else. You'll first want to call VG or Jefferson National to find out if they do, then you can find out what's possible.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Fri Jul 26, 2013 9:17 pm

Yeah if they are not in IRA's you are looking at 1035 exchanges or liquidating and paying taxes.
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Re: My wife and I have inherited two variable annuities...

Postby mnnice » Fri Jul 26, 2013 9:53 pm

Retread wrote:
Otops wrote:You are correct. Technically my wife inherited them.

Not just technically - your wife inherited them.
Bruce


OP did not give his location. If they are in a community property state and have no prenup it is their asset even if she inherited it.
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Re: My wife and I have inherited two variable annuities...

Postby donall » Fri Jul 26, 2013 10:03 pm

Did MIL take distributions? If yes, then because taxable portion is first distributed, there may be only basis (already taxed) and very little taxable left. It may make sense to get this information first before starting a transfer or conversion.
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Re: My wife and I have inherited two variable annuities...

Postby synergy » Sat Jul 27, 2013 12:06 am

I am not a tax expert. The amounts that you are talking about seem to fall below the level that would provoke inheritance tax. Check with a tax advisor if this is a taxable event.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 8:05 am

Thank you, again, everybody! You all have already given me more insight than I could have imagined.

@Ryebrook: I see the complications I'm having are due to the fact that this is a true variable annuity. From what I'm gathering we can't make any changes and have to accept the terms my Mother-in-Law agreed to since the distributions had already begun. (Thank you for posting the IRS code.)

@MN Finance: Thank you for confirming that the money HAS TO STAY. Knowing that do the numbers above help at all in determining what you would do if you were US? Curious... Annuity A has a TAX COST BASIS of 73,093.19, TOTAL GROSS INVESTMENT of 108,222.31 and a CASH SURRENDER VALUE of 135,231.61. Our ultimate goal is to pay off our house as soon as possible. We would use some/all of this to aid in doing that.

@dickenjb: I have read about 1035 Exchanges. However it looks like we would get hammered by a host of fees. Plus, I'm not even sure if we'd be able to due to the annuities being a non-spousal inheritance. (For the life of me, I don't understand why anybody would mess with annuities. I'd rather by real estate!!!)

@mnnice: We are in central Florida. I believe FL is a 50/50 state. I'm sure if we ever had to go that route my wife would be awarded 80%-100% of the aforementioned annuities. Am I right?

@donall: We are pretty confident my Mother-in-Law began taking distributions but if she did not we have. I don't know if that changes anything. Having said that, I see no indication on any of the statements showing whether she did or not. Then again maybe they shouldn't being that they are in my wife's name now.

@Synergy: We are talking a total inheritance well under the federal estate tax threshold which I believe was five million dollars in the year she passed away. Maybe these things aren't as simple as I read into them but we thought we would be pretty safe regarding inheritance tax.

Thank you all (again)!
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 8:23 am

SOME ADDITIONAL INFORMATION

ANNUITY A BREAKDOWN
-------------------------------
Small Company Value T. Rowe Price UNITS: 2,038.009 VALUE: $67,847.68 50.2%
Blue Chip Growth T. Rowe Price UNITS: 1,770.880 VALUE: $59,380.61 43.9%
Utilities MFS UNITS: 74.146 VALUE: $1,959.39 1.4%
Inter. Small Dim. Fund Advisors (DFA) UNITS: 108.534 VALUE: $1,716.40 1.3%
Amer. Global Growth Capital Res. UNITS: 111.326 VALUE: $1,645.62 1.2%
Amer. New World Capital Res. UNITS: 105.671 VALUE: $1,487.32 1.1%
Natural Resources Wellington UNITS: 35.129 VALUE: $1,194.59 0.9%

Total Contract Value as of 07/26/2013: $135,231.61 100%
Trades remaining: 2

ANNUITY B BREAKDOWN
-------------------------------
Small Company Value T. Rowe Price UNITS: 525.453 VALUE: $17,492.95 46.4%
Health Sciences T. Rowe Price UNITS: 311.720 VALUE: $11,993.31 31.8%
All Cap Value Lord Abbett UNITS: 360.591 VALUE: $8,178.50 21.7%

Total Contract Value as of 07/26/2013: $37,664.76 100%
Trades remaining: 2
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Re: My wife and I have inherited two variable annuities...

Postby BL » Sat Jul 27, 2013 8:25 am

AFAIK, you don't receive a step-up in basis with an inherited annuity, but will owe ordinary income taxes, not capital gains, on the amount above the basis which the original owner had. In other words, you take on the same obligation as the original owner, just as you would if you inherited an IRA.

I expect you will receive a 1099 tax statement with the portion which is basis subtracted from the total distribution you receive during the year. If you cash it all in, I would expect that you would pay tax (at the bracket it puts you in) on all of the gain. Please check with the company, the IRS, and your tax preparer, so you at least know what to expect. Possibly you could split it between this year and next if that would help keep you in a lower bracket.

Edt: I see this happened 3 years ago. Check your 1040 from last year and look for the 1099 information you have already received. That should give you some idea of how it is taxed. I don't know whether it can be cashed in, but why not ask the company?

Edt: If you decide to keep it due to taxes owed, I suggest you check into the 1035 exchange at a low-cost source such as Vanguard. You are probably being hammered by fees at your current location and it might be worthwhile to see if you can gain by the exchange.
Last edited by BL on Sat Jul 27, 2013 8:45 am, edited 1 time in total.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 8:40 am

Thank you BL. So far, from the two distributions, we have received 1099-Rs. Obviously the RECEIPT DUE TO DEATH box was checked for both. What I don't understand is that the IRA/SEP/SIMPLE BOX is checked for the smaller one but not for the larger one. (According to the back of the 1099-R box 7 DISTRIBUTION CODE(S) it indicates that if the box is checked you have received a traditional IRA, SEP or SIMPLE distribution.)

To me this is confusing stuff!
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Re: My wife and I have inherited two variable annuities...

Postby donall » Sat Jul 27, 2013 9:00 am

What do you get if you cash out? Do you receive the Total gross investment amount or the larger figure? You usually can redeem a portion of the annuity value. It would also be beneficial to look into the expenses you are paying on the variable annuities. When I looked into that, it was not a tough decision.
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Re: My wife and I have inherited two variable annuities...

Postby BL » Sat Jul 27, 2013 9:03 am

Otops wrote:Thank you BL. So far, from the two distributions, we have received 1099-Rs. Obviously the RECEIPT DUE TO DEATH box was checked for both. What I don't understand is that the IRA/SEP/SIMPLE BOX is checked for the smaller one but not for the larger one. (According to the back of the 1099-R box 7 DISTRIBUTION CODE(S) it indicates that if the box is checked you have received a traditional IRA, SEP or SIMPLE distribution.)

To me this is confusing stuff!


So you just learned that one is an IRA (qualified annuity). It may? be too late to change things now that would have been allowed shortly after receiving it. There probably is no basis, assuming it was done with money that she did not pay tax on earlier. If the 1099 shows the taxable amount to be the same as the total withdrawn, that is what happened. The non-qualified one should have two different amounts for total withdrawn and total taxable based on the basis.

The selling point of annuities is the tax-deferral for many years so it might be wise to make use of that or at least figure out the cost before cashing in, if that is indeed possible.

Edt: I agree it is probably expensive to keep it as well. Find out your options and then decide.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 9:12 am

donall, I've never asked the question to find out. I'm going to call John Hancock on Monday and ask.

ANNUITY A = 0.00 in fees according to the statements and website. I'm assuming the only fees being paid are the mutual fund fees and expenses on the units owned inside.

ANNUITY B = 30.00 in contract fees. Also assuming natural mutual fund fees and expenses here as well.

Looks like a pretty low-cost arena. (Again, maybe I see it too simply.)
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 9:27 am

BL wrote:
Otops wrote:Thank you BL. So far, from the two distributions, we have received 1099-Rs. Obviously the RECEIPT DUE TO DEATH box was checked for both. What I don't understand is that the IRA/SEP/SIMPLE BOX is checked for the smaller one but not for the larger one. (According to the back of the 1099-R box 7 DISTRIBUTION CODE(S) it indicates that if the box is checked you have received a traditional IRA, SEP or SIMPLE distribution.)

To me this is confusing stuff!


So you just learned that one is an IRA (qualified annuity). It may? be too late to change things now that would have been allowed shortly after receiving it. There probably is no basis, assuming it was done with money that she did not pay tax on earlier. If the 1099 shows the taxable amount to be the same as the total withdrawn, that is what happened. The non-qualified one should have two different amounts for total withdrawn and total taxable based on the basis.

The selling point of annuities is the tax-deferral for many years so it might be wise to make use of that or at least figure out the cost before cashing in, if that is indeed possible.

Edt: I agree it is probably expensive to keep it as well. Find out your options and then decide.


So are you saying it is an IRA rolled into an annuity if the box was checked? Which would be ANNUITY B even though the John Hancock statements and website show no indication of that being the case. I guess I'll only know after I call John Hancock on Monday. I've definitely gained a lot of information from this post. Best of all, I have armed myself with some good questions.

When you say "It may be too late..." are you referring to the sixty day period after inheritance when you are supposed to decide on the terms of payment? I take it there's no way of retracting from our initial request? If that's the case, they certainly don't give a grieving family much time to make a sound decision do they?
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Re: My wife and I have inherited two variable annuities...

Postby donall » Sat Jul 27, 2013 9:44 am

Otops wrote:donall, I've never asked the question to find out. I'm going to call John Hancock on Monday and ask.

ANNUITY A = 0.00 in fees according to the statements and website. I'm assuming the only fees being paid are the mutual fund fees and expenses on the units owned inside.

ANNUITY B = 30.00 in contract fees. Also assuming natural mutual fund fees and expenses here as well.

Looks like a pretty low-cost arena. (Again, maybe I see it too simply.)


Please don't assume that your only fees are fees for the mutual fund. Variable annuities are full of fees, expenses, and costs. In fact, when you call Monday, use all three of those words, because there are myriad costs, and expenses in both the mutual fund and annuity structure. For example, annuities commonly have a death benefit fee (ensures you get original amount put into annuity if market goes down). Fees are not commonly listed, but lower the profits. The listed fee in Annuity B may only be the tip of the iceberg. Mutual fund fees are often high, about 1%. Total fees could easily be 3-5%.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 1:47 pm

donall wrote:
Otops wrote:donall, I've never asked the question to find out. I'm going to call John Hancock on Monday and ask.

ANNUITY A = 0.00 in fees according to the statements and website. I'm assuming the only fees being paid are the mutual fund fees and expenses on the units owned inside.

ANNUITY B = 30.00 in contract fees. Also assuming natural mutual fund fees and expenses here as well.

Looks like a pretty low-cost arena. (Again, maybe I see it too simply.)


Please don't assume that your only fees are fees for the mutual fund. Variable annuities are full of fees, expenses, and costs. In fact, when you call Monday, use all three of those words, because there are myriad costs, and expenses in both the mutual fund and annuity structure. For example, annuities commonly have a death benefit fee (ensures you get original amount put into annuity if market goes down). Fees are not commonly listed, but lower the profits. The listed fee in Annuity B may only be the tip of the iceberg. Mutual fund fees are often high, about 1%. Total fees could easily be 3-5%.


Thank you again donall. You know what they say when one "assumes". I'm a prime example of that. I will explore the fees and report back.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Sat Jul 27, 2013 8:57 pm

Chances are the $30 annual fee is the tip of the iceberg. You are probably paying M&E fees (mortality and expense) of about 1 to 1.5% and the subaccounts probably carry fees of 1 to 1.5%. That is if there are no additional "riders" such as a GLWB being applied.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sat Jul 27, 2013 9:52 pm

One would think the fees and expenses of each annuity would be listed somewhere. The thing that gets me is that I don't know where you would find out if you didn't call and ask. Guess they don't want one to know.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Sun Jul 28, 2013 8:38 am

I believe they are listed in the 300 page onionskin paper contract which few people read. Instead they eat the free dinner and rely on the pitch of a slick sales person who promises a "guaranteed" 5% or whatever. Remember annuities aren't bought, they are sold.
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Re: My wife and I have inherited two variable annuities...

Postby bsteiner » Sun Jul 28, 2013 9:01 am

dickenjb wrote:I believe they are listed in the 300 page onionskin paper contract which few people read. Instead they eat the free dinner and rely on the pitch of a slick sales person who promises a "guaranteed" 5% or whatever. Remember annuities aren't bought, they are sold.


If you go to the free dinner seminar, and you're the one who buys the annuity, the living trust, the timeshare, or the bridge, not only did you pay for your free dinner, but you paid for the free dinners for everyone else in the room. (That's not to say that one of the above things might be appropriate in some cases, just not in most cases.)
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sun Jul 28, 2013 9:20 am

dickenjb wrote:I believe they are listed in the 300 page onionskin paper contract which few people read. Instead they eat the free dinner and rely on the pitch of a slick sales person who promises a "guaranteed" 5% or whatever. Remember annuities aren't bought, they are sold.


You are probably right about the contract. To me, annuities are an absolute last resort and I'm quite confident I will never let myself go there.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sun Jul 28, 2013 9:22 am

bsteiner wrote:
dickenjb wrote:I believe they are listed in the 300 page onionskin paper contract which few people read. Instead they eat the free dinner and rely on the pitch of a slick sales person who promises a "guaranteed" 5% or whatever. Remember annuities aren't bought, they are sold.


If you go to the free dinner seminar, and you're the one who buys the annuity, the living trust, the timeshare, or the bridge, not only did you pay for your free dinner, but you paid for the free dinners for everyone else in the room. (That's not to say that one of the above things might be appropriate in some cases, just not in most cases.)


I wish I could have been around when my mother-in-law began the talks with her financial advisor (who is still the current manager of these annuities). However his part of the equation is permanently changing within the next few days.
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Re: My wife and I have inherited two variable annuities...

Postby Eric » Sun Jul 28, 2013 9:54 am

mnnice wrote:OP did not give his location. If they are in a community property state and have no prenup it is their asset even if she inherited it.


Not true. Inheritances are separate property in every community property state I'm familiar with. See, e.g., Section 3.001 of the Texas Family Code. In some states the post-death income generated by an inheritance will be community property, but that is a separate issue (and "income" for these purposes does not mean taxable income, it's a different concept).

Now, it's true that property is presumed to be community property unless proven otherwise. So if property is commingled, or if you lack the financial records to trace the funds back to their original source, then you may have a problem. But that, too, is a separate issue.

As always, these comments are not legal advice, and I encourage readers to consult an attorney in their own state if this may affect them.
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Re: My wife and I have inherited two variable annuities...

Postby donall » Sun Jul 28, 2013 12:02 pm

OP:
The senior relative I am working with had an annuity for a fixed 3% (not an immediate annuity) and a variable annuity. Both were terminated because the high fees ate up the returns. The most recent terminated annuity was the 3% fixed annuity. The relative and I both made assumptions that we should not. The fixed 3% annuity sounded great in today's interest rate interest environment, but was not really earning 3%, but 1.5%, see page X, paragraph X. At this point the fees were making an effective rate of 0. So the annuity was terminated and invested in Ibonds and a CD. The relative gets a small interest rate, government guaranteed principal, and a lot less paperwork to read.

The variable annuity was terminated years ago and invested in an index mutual fund, so annuity fees were avoided and market gains and dividends were taxed at better tax rates than ordinary income tax rate that annuities are.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Sun Jul 28, 2013 12:31 pm

But I am advising an elderly couple that is actually earning 3.75% on two fixed annuities they bought back when interest rates were higher.

OP, you don't say what your mortgage rate is. Check out the fixed rate available on the annuities. Often times the fixed option also eliminates the M&E fee and it may be an attractive fixed rate if the annuities were bought at an opportune time.
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Re: My wife and I have inherited two variable annuities...

Postby donall » Sun Jul 28, 2013 3:24 pm

dickenjb wrote:But I am advising an elderly couple that is actually earning 3.75% on two fixed annuities they bought back when interest rates were higher.

OP, you don't say what your mortgage rate is. Check out the fixed rate available on the annuities. Often times the fixed option also eliminates the M&E fee and it may be an attractive fixed rate if the annuities were bought at an opportune time.


OP has variable annuities, not fixed. You are right that older immediate annuities can have interest rates that look excellent in today's environment.
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Re: My wife and I have inherited two variable annuities...

Postby dickenjb » Sun Jul 28, 2013 3:38 pm

donall wrote:
dickenjb wrote:But I am advising an elderly couple that is actually earning 3.75% on two fixed annuities they bought back when interest rates were higher.

OP, you don't say what your mortgage rate is. Check out the fixed rate available on the annuities. Often times the fixed option also eliminates the M&E fee and it may be an attractive fixed rate if the annuities were bought at an opportune time.


OP has variable annuities, not fixed. You are right that older immediate annuities can have interest rates that look excellent in today's environment.


Yes but variable annuities usually offer a fixed account that might also have an attractive yield as a floor. 3% is not uncommon, and you avoid M&E charges.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sun Jul 28, 2013 4:10 pm

dickenjb wrote:But I am advising an elderly couple that is actually earning 3.75% on two fixed annuities they bought back when interest rates were higher.

OP, you don't say what your mortgage rate is. Check out the fixed rate available on the annuities. Often times the fixed option also eliminates the M&E fee and it may be an attractive fixed rate if the annuities were bought at an opportune time.


dickenjb our mortgage rate is 4.25 with 151,775.03 remaining.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Sun Jul 28, 2013 4:12 pm

I haven't seen a single indicator of any fixed rate. Yet another question I will ask tomorrow. I'm going to grill whoever I get on the phone.
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Re: My wife and I have inherited two variable annuities...

Postby Otops » Tue Aug 27, 2013 10:43 am

Well... I'm not giving up but it sounds like there is no way to withdraw the funds from both of these annuities. I'm going to sit down with a friend's financial planner tomorrow to see if he knows anything.

I must say, this has been a pretty frustrating situation.
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Re: My wife and I have inherited two variable annuities...

Postby Peter Foley » Tue Aug 27, 2013 11:18 am

I would suggest you try to figure out in advance the tax consequences of cashing out each of the annuities separately. If the HH income you listed is gross income, not taxable, you are way below the threshold for the 25% bracket ($72,500 taxable). Cashing out the smaller annuity now might make some sense. Revisit your options with respect to the larger annuity next year.

If one can make partial withdrawals from an annuity it might make sense to do it over the course of a few years.
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Re: My wife and I have inherited two variable annuities...

Postby bsteiner » Tue Aug 27, 2013 11:55 am

When the annuity has been in effect for a while, and the value is significantly higher than the basis, there's a tradeoff. If you keep the annuity, you'll incur the future costs of the annuity (which you can mitigate by moving it to Vanguard) and you'll convert the future income and gains to ordinary income. On the other hand, if you cash it in, you'll accelerate the income.

Has anyone analyzed the tradeoff and developed any rules of thumb?
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Re: My wife and I have inherited two variable annuities...

Postby Alan S. » Tue Aug 27, 2013 1:07 pm

Otops wrote:Well... I'm not giving up but it sounds like there is no way to withdraw the funds from both of these annuities. I'm going to sit down with a friend's financial planner tomorrow to see if he knows anything.

I must say, this has been a pretty frustrating situation.


There is a recent PLR that facilitates doing a 1035 exchange for beneficiaries of non qualified annuities. While it will not change the distribution requirements, it could result in much reduced expenses over many years. Read this article by Michael Kitces on this recent letter ruling:
http://www.kitces.com/blog/IRS-Opens-Do ... Annuities/
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Re: My wife and I have inherited two variable annuities...

Postby Bennett47 » Wed Aug 28, 2013 4:38 pm

Many of the posts have made this WAY more complicated than it has to be. Here is what happened. Your mother-in-law invested in 2 variable annuities. One was non-qualified, one was an IRA. One of the reasons why people invest in a variable annuity is the death benefit. Your mother-in-law named her daughter as her beneficiary. This entitles her to whatever death benefit the annuity provides. Now...under the description of the payout option on your original post...you indicated that it said something like "stretch option only"....meaning that the death benefit is being paid out to the beneficiary (your wife) as a stream of periodic payments. That could be the case for one of 2 reasons.

First reason would be that when she set up the annuity, your wife's mother elected this option. If she did then she was basically saying...I want my daughter to get this money, and I want her to get it over time...not all at once. Why would she do this? Maybe to make sure the money lasted for a long time, that it didn't get spent all at once, maybe to minimize the effect of taxes...maybe she was worried that yer daughter would inherit this money than a few months later you and her get divorced and you get half....who knows what her thought process was. But IF the reason your wife is getting this annuity death benefit as a stream of income is because her mother ELECTED that...then that was her choice and there is nothing you or your wife can do to change that. She is the beneficiary, she gets it how her mother decided she will get it.

OR...the second reason why she is getting this paid out over time or "stretched"....could be that your wife ELECTED to get it that way. You say you met with the advisor on the annuity...after her mother's passing. So at that meeting....did your wife CHOOSE to take it as a "stretch" payout? Perhaps the advisor explained the tax consequences of taking all the money out at once....and presented the option to stretch the payments over time....as a way to not have a year where you fall in a higher tax bracket and thus pay more in taxes on this money? Do you recall that? Did she make that decision? If so...then yes....that was her decision and it sticks.

It is easy to paint the annuity company as the bad guy here. Most people do when it comes to annuities. But this case is really simple...your wife is the beneficiary....she gets the money. And either SHE decided...or HER MOTHER decided...that the money would be paid to her over time and NOT in a lump sum. Either way, the decision was made and so that's it.

You probably can change investment options within the annuity, but as to the payout feature...it appears that has been set and the annuity company is just following the WRITTEN INSTRUCTIONS...of either your wife or her mother.
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Re: My wife and I have inherited two variable annuities...

Postby Bennett47 » Wed Aug 28, 2013 8:09 pm

Original poster....you mention that for the life of you, you can't see why anyone would mess with annuities. Tons of reasons, but for someone in their 70s like your mother-in-law....a common answer is to be able to invest and also protect the money for her beneficiaries. It appears that is what was happening in your case.

The most basic form of "beneficary protection" with an annuity is a simple death benefit feature that says that upon death, the beneficary receives either the current account value....or the starting investment amount....whichever is higher. That can be very powerful for elderly investors.

Consider this: I am in my mid-70s with $500,000 in the bank earning less than 1%. I am in poor health. I plan to never use this money, and will leave it to my daughter when I die. I would like to invest in something to earn more than the tiny interest rate my bank is paying me.

I invest it all in low cost mutual funds. The market tanks like it did in 2000-2002. My $500,000 account is worth $350,000. I die. My daughter gets the $350,000.

Or...I invest in a variable annuity with the death benefit like above. Again the market tanks. My $500,000 drops to $335,000...even worse than the mutual funds because the annuity has higher fees. That we all hate so much. I die. My daughter gets $500,000. How does that annuity purchase look now? And...if I want...I can have the annuity company pay her over time not all at once. Just like a trust would do for a beneficiary where you don't want them to receive all the inherited money at one time. It's my choice. Not a bad setup at all.

When your primary concern is passing assets to a beneficiary.....and you cannot get life insurance due to health....an annuity is ONE option to make sure that your beneficiaries are protected.

I suggest to you that perhaps....just perhaps....your mother-in-law used annuities because she knew full well that some day the money would go to her daughter....and she wanted some protection there.
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Re: My wife and I have inherited two variable annuities...

Postby dhodson » Wed Aug 28, 2013 9:54 pm

Bennett47 wrote:Original poster....you mention that for the life of you, you can't see why anyone would mess with annuities. Tons of reasons, but for someone in their 70s like your mother-in-law....a common answer is to be able to invest and also protect the money for her beneficiaries. It appears that is what was happening in your case.

The most basic form of "beneficary protection" with an annuity is a simple death benefit feature that says that upon death, the beneficary receives either the current account value....or the starting investment amount....whichever is higher. That can be very powerful for elderly investors.

Consider this: I am in my mid-70s with $500,000 in the bank earning less than 1%. I am in poor health. I plan to never use this money, and will leave it to my daughter when I die. I would like to invest in something to earn more than the tiny interest rate my bank is paying me.

I invest it all in low cost mutual funds. The market tanks like it did in 2000-2002. My $500,000 account is worth $350,000. I die. My daughter gets the $350,000.

Or...I invest in a variable annuity with the death benefit like above. Again the market tanks. My $500,000 drops to $335,000...even worse than the mutual funds because the annuity has higher fees. That we all hate so much. I die. My daughter gets $500,000. How does that annuity purchase look now? And...if I want...I can have the annuity company pay her over time not all at once. Just like a trust would do for a beneficiary where you don't want them to receive all the inherited money at one time. It's my choice. Not a bad setup at all.

When your primary concern is passing assets to a beneficiary.....and you cannot get life insurance due to health....an annuity is ONE option to make sure that your beneficiaries are protected.

I suggest to you that perhaps....just perhaps....your mother-in-law used annuities because she knew full well that some day the money would go to her daughter....and she wanted some protection there.



He should have said except for Spias but otherwise he is correct. Nice pretend story.
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Re: My wife and I have inherited two variable annuities...

Postby MN Finance » Wed Aug 28, 2013 10:48 pm

Bennett47 wrote:Original poster....you mention that for the life of you, you can't see why anyone would mess with annuities. Tons of reasons, but for someone in their 70s like your mother-in-law....a common answer is to be able to invest and also protect the money for her beneficiaries. It appears that is what was happening in your case.

The most basic form of "beneficary protection" with an annuity is a simple death benefit feature that says that upon death, the beneficary receives either the current account value....or the starting investment amount....whichever is higher. That can be very powerful for elderly investors.

Consider this: I am in my mid-70s with $500,000 in the bank earning less than 1%. I am in poor health. I plan to never use this money, and will leave it to my daughter when I die. I would like to invest in something to earn more than the tiny interest rate my bank is paying me.

I invest it all in low cost mutual funds. The market tanks like it did in 2000-2002. My $500,000 account is worth $350,000. I die. My daughter gets the $350,000.

Or...I invest in a variable annuity with the death benefit like above. Again the market tanks. My $500,000 drops to $335,000...even worse than the mutual funds because the annuity has higher fees. That we all hate so much. I die. My daughter gets $500,000. How does that annuity purchase look now? And...if I want...I can have the annuity company pay her over time not all at once. Just like a trust would do for a beneficiary where you don't want them to receive all the inherited money at one time. It's my choice. Not a bad setup at all.

When your primary concern is passing assets to a beneficiary.....and you cannot get life insurance due to health....an annuity is ONE option to make sure that your beneficiaries are protected.

I suggest to you that perhaps....just perhaps....your mother-in-law used annuities because she knew full well that some day the money would go to her daughter....and she wanted some protection there.


Puke. Let's try an example where a 70 year old invests in an annuity and pays 3% per year to much for your mythical "protection" but lives 20 years and ends up handing over 2/3rds of their account balance to a conviction-less annuity salesman and fat insurance ceos and leaves the kids with nothing. You also don't need to hijack an old thread.

To the OP: you said there's no way to get money out, which can't be true. What additional info did you learn some last month?
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Re: My wife and I have inherited two variable annuities...

Postby MN Finance » Wed Aug 28, 2013 11:00 pm

bsteiner wrote:When the annuity has been in effect for a while, and the value is significantly higher than the basis, there's a tradeoff. If you keep the annuity, you'll incur the future costs of the annuity (which you can mitigate by moving it to Vanguard) and you'll convert the future income and gains to ordinary income. On the other hand, if you cash it in, you'll accelerate the income.

Has anyone analyzed the tradeoff and developed any rules of thumb?


Ive tried but there are to many variables. Basically the positive compounding effects are minimal once it's inherited and being paid out, so unless there's a personal income tax drop coming, it always wins to take out up to the top of the current tax bracket and typically beyond that if expenses are above 1%, which most are. Paying 10% more in taxes today vs. 10 years of 1% fees (not counting compounding effects which are almost zero with today's low interest rates for bonds, and stock gains which turn into cap gains if reinvested)
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Re: My wife and I have inherited two variable annuities...

Postby Bennett47 » Wed Aug 28, 2013 11:00 pm

Ok MN Finance. Let's go with your example. I am the 70 year old idiot who buys an annuity with the death benefit feature I described. The insanely high fees plus a volatile market eats up 2/3 of my investment over 20 years...let's say I started with $600,000. I now have just $200,000 at age 90. I die.

How much does my beneficiary get? $600,000.

How much would she have gotten if I invested in mutual funds? Unknown.

Again I say that IF the primary concern is WHAT IS LEFT TO BENEFICIARIES....then the annuity idea is not puke.

Trust me that for many, many people that beneficiary protection is a BIG concern for them.
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Re: My wife and I have inherited two variable annuities...

Postby MN Finance » Wed Aug 28, 2013 11:29 pm

Bennett47 wrote:Ok MN Finance. Let's go with your example. I am the 70 year old idiot who buys an annuity with the death benefit feature I described. The insanely high fees plus a volatile market eats up 2/3 of my investment over 20 years...let's say I started with $600,000. I now have just $200,000 at age 90. I die.

How much does my beneficiary get? $600,000.

How much would she have gotten if I invested in mutual funds? Unknown.

Again I say that IF the primary concern is WHAT IS LEFT TO BENEFICIARIES....then the annuity idea is not puke.

Trust me that for many, many people that beneficiary protection is a BIG concern for them.


Ridiculous. You won't fool anyone here.

Invest for 20 years. Market is up 6% annualized and the annuity holder gets 3%. Market does poorly and is flat for 20 years and it's still 600. Either case, a traditional portfolio wins. Add to that the annuity restrictions on investments and tax differences and it's even worse. Not even worth the time to dig up all the data on the fallacy you're promoting.
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Re: My wife and I have inherited two variable annuities...

Postby Bennett47 » Wed Aug 28, 2013 11:45 pm

Now you are comparing probably/likely to guaranteed. Is the account value guaranteed to be worth $600,000 in 20 years if I invest in mutual funds? Because the insurance company is guaranteeing that much to my beneficiaries. Apples and oranges.

By the way, the exact death benefit I described is offered on the Vanguard Variable Annuity. At a cost of 0.05% more than the basic death benefit that pays the beneficiary the account value at death with no minimum guarantee. An elderly investor concerned about beneficiaries would be crazy not to elect the guaranteed return of premium option.

You wanna know why advisors sell annuities for cases like this? Because when the 70 year old client says "I want growth....but I want to make sure I leave at least this much to my children"....well then guess what....mutual funds do not offer that. It's not always about their commission as you seem to believe. It is about them listening to their client and their concerns.

Try being an advisor that hears that, and then puts the client's money in mutual funds. How fast do you think the kids will sue you if they know what their parent said to you....yet you sold them mutual funds....in March of 2000....and then they died in 2002?

You can talk to the kids until your blue in the face about how the market has always been up over long periods....all the stuff WE know. But the kids will say "He told you he wanted to make sure we inherited AT LEAST what he started with. You put him in an investment where there was a RISK that WOULD NOT HAPPEN."

And then you are toast and your career as an advisor is over.

I believe the market will be up in 20 years. But I can't guarantee that. If I was an advisor making a recommendation and the client said they want growth but want to protect it for their heirs...I would absolutely discuss the pros and cons of the Vanguard Variable Annuity.

Probability does not equal guarantee. Period.
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Re: My wife and I have inherited two variable annuities...

Postby MN Finance » Thu Aug 29, 2013 12:28 pm

Bennett47 wrote:You wanna know why advisors sell annuities for cases like this? Because when the 70 year old client says "I want growth....but I want to make sure I leave at least this much to my children"....well then guess what....mutual funds do not offer that. It's not always about their commission as you seem to believe. It is about them listening to their client and their concerns.


False. Advisors put money into annuities because of the income it means to them personally.

Bennett47 wrote:Try being an advisor that hears that, and then puts the client's money in mutual funds. How fast do you think the kids will sue you if they know what their parent said to you....yet you sold them mutual funds....in March of 2000....and then they died in 2002?

You can talk to the kids until your blue in the face about how the market has always been up over long periods....all the stuff WE know. But the kids will say "He told you he wanted to make sure we inherited AT LEAST what he started with. You put him in an investment where there was a RISK that WOULD NOT HAPPEN."

And then you are toast and your career as an advisor is over.


Then the advisor has no conviction and doesn't belong in the business. They can do it the easy way or the right way. And the easy ways pays them more and retains clients which benefits only themselves, not the investor. And if they can't accurately discern and/or communicate risk/return, then they're either fresh out of school or have 30 years of industry experience which is 1 year repeated 30 times.

Bennett47 wrote:I believe the market will be up in 20 years. But I can't guarantee that. If I was an advisor making a recommendation and the client said they want growth but want to protect it for their heirs...I would absolutely discuss the pros and cons of the Vanguard Variable Annuity.

Probability does not equal guarantee. Period.


The guarantee is exclusively a promise to pay by the insurance co backed by it's solvency, so "guarantee" is a generous word to use. Probability is more accurate for both the insurance co and investments. There has never in history been a rolling 10 year period where returns on a balanced portfolio are negative, let alone a 20 year period. We can argue that it's different this time, but clearly the "probability" of the portfolio being negative is no less than that of the insurer be insolvent.
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