Ross Friend

I have had several clients pass away in the last 12 months and all with different “types” of beneficiaries, e.g. spouse, family trust, children, siblings, with varying degrees of planning efficiencies in distributing the client’s wealth. Poor planning or failure to update one’s intentions can and may lead to an unexpected outcome, i.e. ask the IRS. There is never a bad time to ensure the client’s assets are reviewed for the most efficient tax transfer and aligned with their objectives. The SECURE Act changed the retirement and estate-planning landscape and you need to be aware of the tax efficiencies available whether you are a surviving spouse or not.

I will first address Qualified IRAs. To qualify as an eligible designated beneficiary, the IRA must designate a specifically named beneficiary. Eligible designated beneficiaries may use the pre-SECURE-Act rules for RMDs, and stretch distributions based on the beneficiary’s life expectancy. The surviving spouse so long as s/he is not 10 years younger may either stretch the IRA or commingle with a personal IRA. On the other hand, the surviving spouse can designate the IRA as their own by rolling it over or transferring it to the surviving spouse’s existing IRA or to a new IRA account in their name. The latter is not a stretch IRA but sometimes called a fresh start IRA since the RMD schedule is determined solely by the surviving spouse’s age.

With a stretch IRA for a surviving spouse, s/he can assume a beneficiary status rather than treat the IRA as their own. Assuming the original owner had not reached RMD age, RMDs are then calculated on the surviving spouse’s life expectancy. A Stretch IRA is a strategy to lengthen the IRA’s tax deferral by withdrawing only the RMDs for a period based on life expectancy. The Stretch provision provides significant tax savings to the beneficiary, allowing them to spread the income over a longer number of tax years, minimize the tax rates applied to the income and allow the account to grow tax deferred. Non spouse ineligible designated beneficiaries must distribute the proceeds and/or pay taxes on the assets within 10 years. Being “ineligible” typically simply means not being a spouse, so you have less options but still many you may not have been aware of. The 10-year rule applies to both traditional IRAs and Roth IRAs.

Many factors apply to determine which withdrawal strategy within the 10-year period should be selected. Considerations like age, whether still working, tax bracket, financial need, amd how close one is to retirement will impact the decision in selecting the best schedule for withdrawals for that recipient: Take the entire account balance immediately; delay any payments till the end of the distribution period; take withdrawals over the 10-year period; determine whether RMDs must be taken based on the required beginning date for RMDs for the deceased Owner; or even consider a partial or full tax conversion to a Non-Qualified contract!

Addressing inherited non qualified funds has separate rules but some of the identical considerations apply.

Rather than taking a distribution as a lump sum or over a five-year period, the non qualified stretch allows the beneficiary to meet IRS distribution requirements. They can take distributions over a period equal to their life expectancy, which spreads out the taxes due on the gains over their lifetime. There is no 10-year limitation. (Note in a rare circumstance a much older beneficiary’s life expectancy could be less than 10 years.) This is a big deal and should be seriously taken into account. This increased flexibility reduces an immediate tax burden. A distribution must be received every year that is based on the beneficiary’s life expectancy factor but a real nice feature is that the beneficiary can access more of the monies if they need it. The taxation of the withdrawals will be taxed on a LIFO basis (last-in, first-out) before the cost basis is returned. If there are no gains in the contract, then all withdrawals are not taxed at all.

Clients who leave money to their beneficiaries do create a lasting legacy to be remembered by the current beneficiaries and those progeny after.

There is never a better time than the present to sit with a client to discuss who their assets should pass to, clean up account beneficiary designations and assess whether your designations and plans are aligned. Based on my experience, failing to review this “unpleasant” topic (which can be extremely challenging) can result in some loved ones feeling slighted and affect lifetime relationships long after your client passes. Unfortunately, I have witnessed some clients’ families becoming estranged over the amount they received and when it is distributed. The last regret in life the client would ever have imagined.

Sometimes the most difficult step is having your client discuss his/her plans with the key beneficiaries while alive. The client may simply feel that s/he is not capable of doing so because of certain family dynamics. “They’ll figure it out” is not planning and may result in making the IRS your richest beneficiary. Naturally, your client is entitled to not deal with a potential emotional, stressful discussion. Understood.

Poor financial decision making or procrastination, however, may be an early indicator of frontotemporal dementia. Some with this condition might trust someone they would not normally trust, lead to becoming withdrawn, become less agreeable or on the contrary become less trustworthy, become more disorganized or have increased difficulty completing tasks. At least educating the client and potentially their closest loved one(s) with the available strategies currently permitted under the law should lead to a clearer understanding of their objectives and feelings and lessen the chances of a lifetime of success not being appreciated. Not an easy task for the financial advisor but a far harder one for the client, so everyone needs to proceed diligently and cautiously.

(See My Long Term Care Story As An Advisor, Broker World 10/2021, and Should I Add Annuities To My Retirement Plan Or Not?, Broker World 10/2023.)

Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

Several years ago, there was a financial study that found that most people spend more time planning a family vacation than they do retirement and estate planning. I get it. Its is an uncomfortable topic: Is one afraid to stop working for fear that 1) they may run out of money, a more realistic concern with recent rampant inflation, geopolitical concerns, and interest rate hikes; 2) since they have been working for so many years, subconsciously they always have defined themselves as a____________(at least at social functions) and may feel odd saying that they are “retired.” Since for several years I have been working from home, I recall going to the supermarket one morning during the week and felt this weird sensation when I saw so few shoppers my age that I thought the other shoppers were all looking at me as if I was unemployed. I felt like shouting, “Hey, I’m still working successfully and am not a loser.” Reflecting on that insecurity in the past now makes me realize that retirement has a wide range of feelings for all of us which, with proper planning, will allow us to enjoy the fruits of our laboring years.

For those in the financial services industry, there is a large divide between advisors who are primarily compensated on commissions on the sale of products compared with advisors who tout that they are “always” acting in the clients’ best interests since they are compensated on the recurring fees they receive on “managing” their clients’ assets in part or in whole. Suffice it to say that there are advisors in both camps who truly act in their clients’ best interests with or without a “fiduciary” legally imposed obligation and similarly advisors in both camps who do the opposite.

Formulating a retirement plan whether one does it at an early stage of one’s working career or when one finally or officially stops working, you will see rarely ends up playing out as a person anticipated. Naturally, unforeseen life events take place so developing and anticipating as many contingencies that may occur will assist in the transition process creating less anxiety for you and your loved ones.

Assuming that you start with the timing of commencing social security, that decision, although on its face simple, does involve taking a holistic approach to all the other contingencies, e.g. your anticipated mortality and whether your assets are adequate enough to bridge you to age 70 to take advantage of the eight percent simple growth of your payment.

As you can imagine, I have seen poorly planned or unaddressed legacy issues leave siblings or family members ceasing all contact when elder family members passed due to perceived inequities in the asset distributions. Incredible that family members spend a lifetime together sharing feelings, good times and bad times, caring for each other, yet poor or inadequate planning leaves them forever lost to each other. Not what the elder family members ever could have thought possible. I am afraid to relay I have seen this in my practice more than most folks could believe.

Please read my article My Long Term Care Story As An Advisor (October 2021 Broker World issue) to see how my parents failed to plan for long term care expenses, and to this date my mother’s assets have been completely been wiped out leading to my siblings and I paying for her ongoing care—which is now well over 10k per month. Query whether parents really think that without proper planning that they can assume their children will be financially responsible for them whether they can afford to or not? I would submit that is not the case from either side’s perspective.

It is truly challenging to address retirement issues for fear of running out of funds, so do you need to change your lifestyle or rush out and try to do any supposed bucket list item you’ve been dreaming of for so many years before you are physically unable to do so? What is “enough” (assets accumulated)? Most people don’t drastically change their lifestyles upon that Monday morning when there is no job or work to be done. Some gradually see the “finish line,” slow down, and then say, “I’m going to start exercising, start taking more trips, start a new hobby I’ve been procrastinating about undertaking, or volunteering for a cause that I care about, take classes, read more books, join clubs to make new friends.” The list can be endless. Is it really realistic? One client told me over many years that it was not a matter of if he was going to get divorced but just when, e.g. when his kids left middle school, then when his kids left high school, then when his kids graduated college. As of this writing, he and his wife are still married and his kids both have graduate degrees and young families.

Can one truly flip a switch and now finally start living what some would say is a life like they always really wanted? The concern as you age may not only be “Do I have enough funds to last?” but also “Will my health allow me to be as active as I thought I always wanted to be?”

Sitting down with a reasonable advisor and attorney seems to be a fundamental starting point. There are many pundits, and I am including friends and family members who opine some approaches but probably more conflicting ones. I used to joke that a New Year’s Resolution we should all attempt to abide by is not to follow the advice of one’s brother-in-law. I do not always practice what I preach, since being divorced and remarried I have fallen for this approach on a couple of occasions.

Bad or little to no planning will create a poorly managed retirement and a burden on our loved ones to figure out the mess we left.

Not surprisingly, I recommend you still sound out referrals for that”‘reasonable trusted financial advisor and attorney.” To use a common maxim, no one approach fits all but building buckets of streams of income for you and your loved ones, talking with family members about your intentions, possibly with your advisor/attorney, may ease the challenges upon hearing your plans and contingencies. Personally, my wife and I have set up several annuities supplementing our lifetime income and have a modest amount of life insurance and long term care coverages so as not to burden our children. We have addressed the needs of one adult special needs child, another challenging task in and of itself. Finally, I can go to the supermarket during the week and not have to feel uneasy—although during COVID wearing a mask was not that bad.