Posts Tagged ‘annuities’

Even With No Estate Tax, Some Tax May Be Due on Inheritance

JUNE 9, 2014 VOLUME 21 NUMBER 21

Our clients are often confused about whether their heirs will owe any taxes on the inheritance they are set to receive. We don’t blame them — it’s confusing. Let us try to reduce the confusion.

The federal estate tax limit was raised to $5 million and indexed for inflation in 2011. That means that a decedent dying in 2014 can leave up to $5.34 million to heirs with no federal estate tax consequence at all. It is easy to double that amount for a married couple. And in 2006, Arizona eliminated its state estate tax — so there is no Arizona tax to worry about. That means that there is simply no tax concern for anyone not worth $5 million or more, right? The 99% can pass their entire wealth to their children without fear of tax consequences, right?

Of course that’s not right — it would be way too simple if that were the case. The world — at least the political world — seems to dislike simplicity as much as the physical world abhors a vacuum. Even if your estate is modest, you need to be aware of the tax consequences of leaving money to your heirs. Here are a few of the more common ways your estate might be subject to taxes on your death:

Living, and dying, somewhere other than in Arizona. About half the states, like Arizona, have no estate or inheritance tax. But that means that nearly half of the states do have a tax; some states tax the estate, and some the recipient of an inheritance. Before federal estate tax changes in 2006, it was possible to generalize about those state estate tax regimens — they tended to look alike. But no more. You need to worry about state estate taxes if you live in one of those states with a tax, if you own real estate in one of those states, or if you have heirs who live in one of those states. The details can be mind-bogglingly complex, and they are beyond our scope here. There are plenty of online resources to look up state-by-state rules — we tend to favor this 2013 article from Forbes magazine, partly because it is engagingly titled “Where Not To Die in 2013.” The information is already a year old as we write this, but not that much has changed, and it will give you a good head start.

Owning retirement accounts. You sort of knew this one already, right? You have an IRA, or a 401(k), or a 403(b) retirement plan, and you’ve named your children (or your spouse, or your helpful neighbor) as beneficiary. But keep this in mind: if you leave, say, $100,000 in an IRA to your children, they are going to receive something more like $70,000 of benefit. With careful planning, they can delay the tax liability — but they will pay ordinary income taxes on what they withdraw. Income tax will be paid by anyone receiving the retirement account (except a charity, of course — they pay no income tax), and at their ordinary tax rates. You might have arranged to minimize your own withdrawals, and pay a very low tax rate on the income you do take out — but your daughter the doctor and your son the architect might pay a much higher tax rate and have to start taking money out of the account immediately after your death.

What can you do about that issue? If you have charitable intentions, you can name a charity as beneficiary of your retirement account. You can leave it to grandchildren, who might pay a lower tax rate (and have more immediate use for the money). You can create a trust that forces your heirs to take the money out very slowly. But at the end of that process, some significant income tax is going to be paid by the recipient of your IRA or other retirement account.

Having income-producing property at your death. Arizona does not have an inheritance tax, so there is no tax cost to receiving an inheritance. Except that sometimes there is a small cost. If you leave an estate including, say, stocks and bonds, or mortgages secured by real estate, or anything else that receives income, your estate may incur a small amount of income tax liability during its administration. That can be true even if you create a revocable living trust, since it will typically take 6-12 months to settle even simple estates. But rather than your estate paying the income tax liability, it usually is passed out with distributions to your heirs. So when your daughter hears that there is no tax on her inheritance, she may be surprised when her accountant tells her she owes income tax on a few hundred — or thousands — of dollars of that inheritance.

Having property that has appreciated since you received it. Income tax is usually due on the gain in value of an asset during the time you held it. Most people realize, however, that when you die most or all of your property receives a “stepped-up” basis for calculation of capital gains. That means that your heirs usually do not pay any income tax on the increase in value during the time you owned property.

But be careful — that is not always true. If you gave the property away before your death, or you inherited it in a trust (like a spousal credit shelter trust), it might not get a stepped-up basis. That can mean that the property your heirs receive carries a significant built-in income tax liability. It might not be due immediately on your death, but it might limit their choices about when to sell or give away the property. This is much more of a problem today than it was just a few years ago — with the proliferation of A/B (credit shelter, or survivor/decedent’s) trust planning in the past three decades, a lot of property is now held in trusts and will not get a stepped-up basis on the surviving spouse’s death.

Owning an annuity. You might have done some clever tax planning by buying a tax-sheltered annuity five years ago. But if you die holding that annuity, your heirs might have to pay the income tax on the income accumulated during the years you have held the annuity, and they might have to pay it immediately. Note that tax-sheltered annuities are not called tax-free annuities — they are just a mechanism to delay the income tax liability to a later date when, one presumes, your tax rate might be lower. If your currently-employed children step into your shoes, that assumption might turn out to have been incorrect.

Planning options.  What can you do if you fit into any of these categories? If we are preparing your estate plan, we will talk with you about the issues. Any capable estate planning attorney should be able to see whether you have issues to be concerned about. But that is why we always ask you for detailed information about your assets, your family and your circumstances. Yes, the estate tax regimen has gotten simpler — but that doesn’t meant that the decision-making is necessarily simple.

Consumer Alert: Watch Out for Pitchmen — Come Hear Our Pitch

MARCH 28, 2011 VOLUME 18 NUMBER 11
Are we just too cynical? Is it possible that the flyer we received in the mail last week is genuinely valuable and the company upstanding? Could it be that it is not an annuity sales pitch aimed at seniors?

On one side we see a series of “Consumer Alerts.” They look serious, and they are even numbered. They caution readers to watch out for people holding themselves out as “senior advisor,” “senior consultant,” or similar designations. They even warn the reader that the National Association of Insurance Commissioners is on the watch for those designations, and has adopted a “model regulation” to discourage their use.

By the time you read to “Alert #2,” however, you begin to wonder. It warns you that if you have an annuity that is two years old or older “YOU MUST ATTEND” the seminar advertised on the reverse side of the flyer.

“Alert #3” leaves you even more doubtful. It promises that a series of apparent luminaries will have “RECORDED MESSAGES” at the seminar.

Flip it over, and the flyer invites you to “Be Our Dinner Guest” at one of three high-end local restaurants. Dinner begins at 3:30PM in each case, so you might want to speculate on how that will work. Maybe you won’t have to speculate too much, however; in smaller print you see that dinner will be offered after “our acclaimed workshop.” You will also learn that you have to “qualify to attend,” and that “financial advisors, insurance agents, attorneys and accountants pay $1,000 attendance fee.” Apparently this is a pretty high-powered program!

Who are these people, and what are they up to?

The flyer lists an organization called Secured Financial Solutions, LLC, as sponsor. The principals in Secured Financial Solutions appear to be Anil Vazirani and Richard Radaelli; neither of their names appear anywhere on the flyer we received. Their names do appear in a 2008 article in Life Insurance Selling magazine, which indicates that they generated over $200 million in insurance premiums in the three years before the article — “most of it in fixed indexed annuities.”

Let’s go back to those “consumer alerts.” The first one, remember, identifies the National Association of Insurance Commissioners as being on the lookout for salesmen using designations like “Senior Advisor.” In fact, the NAIC is a very active organization and it does counsel caution in dealing with insurance, annuity and investment advisors. The (then) President-Elect of the NAIC even testified before Congress in 2007 about concerns for designations like “Certified Senior Adviser,” “Certified Retirement Financial Adviser,” “Chartered Senior Financial Planner,” and “Certified Financial Gerontologist.” Those designations, and others like them, falsely imply that their holders have specialized training and expertise. In fact, they tend to be marketing tools rather than meaningful designations, according to Ms. Praeger’s testimony.

A year later, as President of the NAIC, Ms. Praeger had more to say about investment scams targeting seniors. In a June, 2008, press release from the NAIC she gives good advice on how to deal with annuity salesmen. Two of her good ideas: “Beware of ‘free lunch’ investment seminars,” and “Never make a final decision at a seminar.” We think those are good pieces of advice.

In fact, the NAIC has plenty of suggestions for consumers — particularly seniors — to help protect themselves from unscrupulous financial advisers. A few of our favorites:

All right — maybe we’re too cynical. After all, the flyer includes apparent endorsements from a number of luminaries — like Ben Stein (a Fox News commentator who was once discharged by the New York Times over his activities as a pitchman for a questionable “free credit report” product), Charlie Gasparino (another Fox commentator, and author of “The Sellout: How Wall Street Greed and Government Mismanagement Destroyed America’s Global Financial System”) and Harry Dent, Jr. (a financial writer and author who in 2006 predicted the Dow would hit 40,000 by 2010 — it didn’t).

On top of all that, some portion of the enterprise described in the flyer (it is unclear exactly what) is part of “Arizona’s Best in Business — as seen in April 2009, March 2010 & February 2011 of Forbes Magazine.” OK, we’re cynical — we suspect that this refers to an advertisement placed by Secured Financial Solutions. But we’re prepared to be proven wrong and to confess our cynicism about annuity sales tactics and free-dinner workshops.

Reverse Mortgage Danger Signals

This week’s Elder Law Issues addresses a problem that is increasingly common in the senior community: the aggressive sale of reverse mortgage arrangements to homeowners who may not really need or benefit from such a financing technique. We saw the following list of danger signals for reverse mortgage sales, prepared by Massachusetts lawyer Frank J. Kautz, II, and we were impressed with his concise but thorough and insightful comments. We reprint it here with his permission; if you want more information about the author or his employer, please check the citations at the bottom of this newsletter.

Reverse mortgages, as useful as they are, can be misused as well.  These are some, not all, of the danger signals that are possible with these loans.  The single biggest danger signal is someone pressuring you to take the loan or to make an immediate decision for any reason other than protecting your home from a foreclosure sale or other similar emergency.  There are other alternatives to reverse mortgages and they should be explored.

  1. You are not getting counseling from a HUD (or state if required) approved housing counseling agency.
  2. Counseling is perfunctory, extremely short, and/or you are not encouraged or given the chance to ask questions.  Counseling is to help you understand the loan, if you do not, let the counselor know.
  3. You are being steered to or directed to see a particular counselor or lender.
  4. You are being discouraged from looking at or discussing all of the various loan products, even if they might not be useful in your case. It is one thing for you to know a loan or product is not useful to you; it is quite another for either the lender or the counselor to not give you all of the facts and let you decide.
  5. You are being discouraged from talking with family, friends, or the counselor regarding the loan, the loan’s terms, or what you intend to do with the money. While you may choose not to do so on your own, no one should discourage you from talking to anyone, particularly those closest to you, about the loan.
  6. The lender is either not licensed or does not have a product approved by either the federal Department of Housing and Urban Development and/or your state.  HUD’s lender list is available online.
  7. You are asked for any money upon applying for the loan or to pay for any fee outside of closing or that is not listed on the HUD1 form used by the closing attorney.  Please note, you may have to pay for an appraisal.
  8. You are told that providing any money, either up front or to be paid outside of closing, to any party will speed up processing of the reverse mortgage.  (Fourteen days is the shortest known, sixty days is typical.)
  9. You are offered a discount to sign by a certain date and/or are being pressured to accept.  (While there are occasionally programs offered for a limited period of time by various lenders, you should proceed with caution.  Check with the lender’s home office to make sure it is a valid program and find out exactly when it ends.  Occasionally, you can even get the offer extended for a short time.)
  10. Insurance premiums and other loan costs are not explained clearly to you or to your satisfaction.
  11. You have signed a contract or agreement with an estate planning service or firm that requires or claims to require, that you obtain a reverse mortgage to use their services.  Avoid offers in which the service provider promises to invest the money from the reverse mortgage.
  12. You are being pressured to use equity in your home to buy a financial product or something else with the proceeds that you do not necessarily need or may not want or that does not benefit you directly.
  13. Taking a spouse’s name off of the deed to make a reverse mortgage work.  You and your spouse may want to do this, but you should be aware and made aware of the consequences of this decision.
  14. Anyone (children, grandchildren, relatives, friends, etc.) is pressuring you to get a loan so that they can use either all or some of the money from the loan.  Even if they promise to pay the money back, or even sign a promissory note, using a reverse mortgage to make such a loan may well deprive you of the means to help yourself.  You must be sure of your own security first and foremost.

Please note, you may always contact a counselor at any time to discuss any or all of these issues privately.  The counselor is not there to make judgments for you or to pass judgments upon what you intend to do, the counselor is there to give you the information you need to make an informed decision on what you want to do.  Ultimately the final choice, like the responsibility, is yours and yours alone.

About the Author: This week’s guest submission comes from Frank J. Kautz, II, an attorney with Community Service Network, Inc., in Stoneham, Massachusetts. The Community Service Network is a “grass-roots, non-profit agency dedicated to acting as a bridge from individual & family crises to the appropriate service or solution” in the communities north of Boston where it is located.

About the issue: Arizona has not seen the same level of aggressive reverse mortgage sales that other states have experienced. Recent downturns in real estate markets have perhaps reduced the frequency of such sales. But economic turmoil has also put additional stress on many senior households, and the danger of inappropriate reverse mortgage sales remains high. We urge anyone considering a reverse mortgage — or the concerned family members of a senior who has been drawn into the concept — to review Frank Kautz’s list of danger signals.

In our experience, reverse mortgages can be a blessing in some circumstances. The classic reverse mortgage candidate is an older senior, able to live at home for a few more years but lacking the financial resources, and owning a home that would easily provide shelter for those years. Younger seniors, those with other resources, and especially those being counseled to purchase annuities with the reverse mortgage proceeds, should be more cautious about getting independent and experienced advice.

Non-Lawyer Trust Preparation Group Shut Down in Indiana

MAY 3, 2010  VOLUME 17, NUMBER 15

United Financial Systems Corporation looks like they can do it all. According to their website (which you will have to look up for yourself — we don’t want to point to it since it still includes information about how to sign up for the activities that have now been prohibited), they can tell you how to plan your estate, retirement, insurance needs, health care — even your funeral arrangements. There is a disclaimer that lets you know they do not practice law (and do not give investment advice). The Indiana Supreme Court begs to differ.

In a disciplinary action three weeks ago, that state’s high court found that UFSC was “an insurance marketing agency,” and it was practicing law. The company was ordered to stop selling living trusts, to give every client a copy of the Court’s opinion, to offer refunds to all clients they had worked with in the past four years, and to pay the costs and some of the attorney’s fees associated with the proceeding. A handful of lawyers were included in the disciplinary process; most agreed to end their involvement with UFSC (and the practice of participating in non-lawyer legal work) and were dismissed from the case.

What was UFSC doing? It had “Estate Planning Assistants” (non-lawyers) contact prospective customers to tell them about the importance of estate planning. If the customer signed up for the $2,695 living trust package, the salesperson collected $750 to $900 and helped the customer fill out a questionnaire.

That questionnaire was then sent to one of several attorneys UFSC hired to prepare living trusts, wills and powers of attorney. The attorney would be paid $225, and would make one telephone call to the client to discuss the estate plan. Once a trust and supporting documents were prepared the signing was handled by another UFSC salesperson — for another $75 slice of the total fee.

The person handling the signing, whose title was usually “Financial Planning Assistant,” also had access to the customer’s financial information (remember that questionnaire?) and could make recommendations about investment changes. One common proposal was to liquidate other investments in order to purchase an annuity — which, incidentally, would yield a significant commission for the Financial Planning Assistant and UFSC.

The Indiana Supreme Court’s opinion details one extreme example of the effect of this marketing juggernaut. The 72-year-old woman was persuaded to liquidate $500,000 worth of Exxon Mobil stock — the bulk of her entire net worth — in order to purchase an annuity. The result: she incurred a $132,000 income tax liability and her salesperson received a $40,000 commission. State of Indiana ex rel. Indiana State Bar Association v. United Financial Systems Corporation, April 14, 2010.

Would UFSC face the same result in Arizona? Probably not. While the unauthorized practice of law is prohibited by court rule, Arizona repealed its criminal statute decades ago. The Arizona Supreme Court has not been active in reviewing such cases, and indeed has even created a “certified document preparer” classification for non-lawyers who “assist” clients in creating wills and trusts.

How can you avoid being taken advantage of by non-lawyer “estate planners” or “document prepapers”? Lawyers tend to think the best answer is the simplest one: hire a lawyer for your legal needs. If you are approached by a “finanical planning assistant” or something similar, you might want to ask “assistant to whom?”

If the salesperson assures you that they have a crack team of estate planners, tax advisers and financial consultants, ask for a few names, titles and credentials. Above all, be very cautious of any person or group who also happens to sell annuities or other insurance products. Not all insurance salespersons are questionable, but practically all questionable non-lawyer “estate planners” sell insurance products.

Trust Salesmen Alleged To Have Pushed Seniors Into Annuities

JULY 14, 2003 VOLUME 11, NUMBER 2

Philip Klein thought he was getting estate planning advice. At first he probably didn’t realize he was also talking to an insurance agent. His children ended up suing the agent, the insurance company and the “estate planning services” firm employing the agent.

Mr. Klein was 85 years old when he met with Brian Causey, an agent for American Estate Services Inc. (also operating as Advanced Legal Systems, Inc.). Mr. Causey prepared a living trust, a will, a living will and a power of attorney for Mr. Klein. Mr. Causey was not a lawyer; as it turned out, he was an insurance salesman.

Mr. Causey persuaded Mr. Klein that he should liquidate his substantial stock holdings and invest in annuities with American Life and Casualty Company. In all, Mr. Klein ended up liquidating $840,000 in stock to buy the insurance products.

At the beginning of the next year, Mr. Klein received a tax surprise. Because his stock had appreciated in value, he had a $38,000 federal income tax bill to pay. It was at this point that Mr. Klein’s two children even became aware that their father had completely changed his investment holdings.

Mr. Klein died a little more than two years later. While going through his papers, his children learned the full extent of Mr. Causey’s abilities as a salesman. Not only had most of their father’s assets been liquidated to buy annuities, they included substantial penalties for withdrawals and, according to an attorney who reviewed them, were not good estate planning for Mr. Klein at the time.

Mr. Klein’s children sued Mr. Causey, American Estate Services, Addison Insurance Marketing (the insurance firm Mr. Causey worked for), and American Life & Casualty Company. They argued that the defendants had put their own interests—in high commissions and fees—ahead of Mr. Klein’s needs.

At first the Louisiana courts refused to allow Mr. Klein’s children to assert their claims, ruling that they should have acted within one year of first learning about the annuities. The Louisiana Court of Appeal, however, reversed that decision and permitted the case to go forward. Klein v. American Life & Casualty Company, June 27, 2003.

As it turns out some of the defendants in the Klein case are well known across the country. Advanced Legal Systems and Addison Insurance Marketing or related individuals have been the subject of enforcement actions in at least Oregon (in 2001), Indiana (in 1999) and Kansas (in 2001). The Oregon Attorney General has provided a description online of how the companies pressure seniors into buying trusts and annuities. Fellow elder law attorney and friend Tim Takacs (from Tennessee) reported on how an attorney from Kansas got into trouble with the Bar disciplinary board of that state for dealing with Addison Insurance Marketing and a related organization, ALMS.

[After this article appeared in 2003, Addison Insurance Marketing apparently continued to operate–and to get in trouble–in more states. The company and affiliates Gentry Group and American Equity Investment Life Insurance Company were the subjects of a “cease and desist” order from the California Department of Corporations in 2004.]

Note: there is another, unrelated Advanced Legal Systems, Inc., a perfectly legitimate Portland, Oregon, company that provides web services to lawyers.

State Must Formally Adopt Its Medicaid Estate Recovery Rules


In our American system of government the legislature is in charge of making law and policy, and the administrative branch’s job is to interpret and implement those laws without imposing the bureaucrats’ own ideas on the legislature’s programs. That ideal conception, however, runs afoul of the reality of government. Because it is simply impossible to anticipate every variation of a problem, much of the actual administration looks like, and is, legislative in nature.

To keep the making and implementation of administrative policies as public and responsive as possible, most states have adopted laws requiring agencies to publish their planned regulations, submit them to public comment, and consider input from citizens. The law compelling these practices is usually called the Administrative Procedures Act (APA) or some similar name. Arizona has such a law, as does California.

Medi-Cal, California’s version of Medicaid, includes a provision requiring its administrative agency to seek reimbursement for Medi-Cal payments from the estates of at least some deceased Medi-Cal recipients. California law defines “estate” to include the deceased beneficiary’s probate estate, as is true in Arizona and every other state. But California goes further, and permits its estate recovery program to pursue any property that belonged to the deceased beneficiary at the time of death, including property held in joint tenancy or “other arrangement.” The problem: “other arrangement” is not defined in the California law.

Medi-Cal administrators decided that the law should apply to annuities and life estates in at least some circumstances. It first pursued, then decided not to pursue, annuities. In the case of life estate property, Medi-Cal decided to seek recovery if the Medi-Cal beneficiary had once owned the property and transferred it to another person, reserving both a life estate (that is, the right to live on the property for life) and a right to sell the property and retain the proceeds. Neither decision was made as part of a public rule-making process.

A non-profit group, California Advocates for Nursing Home Reform (CANHR) sued to force Medi-Cal to properly publish and adopt its rules. The State objected, and a trial judge dismissed CANHR’s complaint.

The California Court of Appeals has now reversed that decision, finding that there is at least some evidence of improper rule-making. CANHR will now be given a chance in court to prove its allegation that Medi-Cal relies on “underground guidelines and criteria” in pursuing estate recovery. CANHR v. Bonta, January 8, 2003.

©2021 Fleming & Curti, PLC