Variable Annuity With Death Benefit

Summary

Jill on Money with Jill Schlesinger: Episode Summary – "Variable Annuity With Death Benefit"

Release Date: March 31, 2025
Host: Jill Schlesinger, CFP®
Guest: Dan from Seattle

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Introduction to the Episode

In the March 31, 2025 episode of Jill on Money, host Jill Schlesinger delves into the complexities of managing retirement accounts and inheritance planning through a real-life listener scenario. The episode primarily focuses on Dan, a 70-year-old from Seattle, seeking advice on minimizing the tax impact of his traditional IRA for his children.

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Listener's Financial Situation

Dan's Background: Dan begins by sharing his financial landscape following the passing of his wife a year and a half ago. Despite the loss, he reports being financially secure:

• Traditional IRA: $2.4 million
• Social Security: Approximately $35,000 annually
• Rental Income: Around $75,000 annually from five mortgage-free properties valued at $4.5 million total
• Brokerage Account: $3.5 million
• Dependents: Two adult children, ages 26 and 27, with one being financially stable and the other still requiring support.

Timestamp [02:51–11:23]

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The Core Issue: Variable Annuity with Death Benefit

Dan introduces a proposal from his insurance agent regarding a Variable Annuity with Death Benefit aimed at managing Required Minimum Distributions (RMDs) and ensuring a death benefit equivalent to his purchase price. He expresses uncertainty about its efficacy and cost-effectiveness.

Quote:
"My insurance agent said, we've got this variable annuity with a death benefit that kind of guarantees that you've got a death benefit and it unencumbers your IRA obligations."
— Dan [03:08]

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Jill's Analysis and Recommendations

Questioning the Annuity: Jill scrutinizes the necessity and benefits of the proposed annuity, highlighting potential high fees (~2% annually) that could erode Dan’s substantial assets without providing significant benefits.

Quote:
"There's no real reason that you would have to pay 2% a year to an insurance company. Your kids are going to get plenty of money."
— Jill Schlesinger [07:30]

Alternative Strategy – Converting to Roth IRA: Jill advocates for converting portions of Dan's traditional IRA and brokerage accounts into Roth IRAs. This strategy would allow the assets to grow tax-free and provide heirs with a tax-advantaged inheritance, leveraging the step-up in cost basis upon death.

Quote:
"Why not just convert some of the traditional IRA with the money that you have in the brokerage account?"
— Jill Schlesinger [07:08]

Tax Implications and Planning: Jill emphasizes the importance of addressing taxes proactively. By converting to Roth IRAs, Dan can manage his current tax bracket more effectively, especially since Washington State does not impose state income tax. This conversion would minimize the tax burden on his children when they inherit the accounts.

Quote:
"The way that you can minimize the tax hit in the future for your kids is to pay for the tax now."
— Jill Schlesinger [10:25]

Estate Planning and Charitable Giving: While discussing charitable inclinations, Jill introduces the concept of Qualified Charitable Distributions (QCDs). Although Dan is hesitant about donating to charities, Jill suggests researching efficient charities through platforms like Charity Navigator or GiveWell to ensure maximum impact with minimal administrative overhead.

Quote:
"You can start to say, like, hey, what are charitable organizations that I like that don't have, you know, all the money going to overhead."
— Jill Schlesinger [11:22]

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Key Insights and Takeaways

1. Evaluate Financial Products Critically:
   Before committing to financial products like annuities, it's crucial to assess their fees, benefits, and how they align with your overall financial strategy.

2. Leverage Roth IRA Conversions:
   Converting traditional IRAs to Roth IRAs can be a strategic move to provide tax-free inheritance to heirs, especially when anticipating a high tax environment or significant asset growth.

3. Understand RMDs and Their Implications:
   Required Minimum Distributions can be managed more effectively through strategic planning, ensuring assets are utilized in a tax-efficient manner.

4. Consider Comprehensive Estate Planning:
   Beyond retirement accounts, evaluating all assets, including real estate and brokerage accounts, is essential for a holistic estate plan that benefits both the individual and their heirs.

5. Charitable Giving as a Flexible Option:
   Even if not actively inclined towards philanthropy, incorporating charitable giving through efficient channels can provide tax benefits and fulfill personal or familial values.

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Conclusion and Final Advice

Jill wraps up the episode by reiterating the importance of personalized financial planning. She encourages listeners to consult with their accountants to tailor strategies that fit their unique circumstances. Jill also invites listeners to reach out with their financial questions and engage with the Jill on Money community for ongoing support and resources.

Quote:
"Use your money. Spend a little more money, will you?"
— Jill Schlesinger [12:25]

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Notable Quotes with Timestamps

• "Security doesn't come in the form of an insurance product that costs me 2% a year."
  — Jill Schlesinger [07:30]

• "The way that you can minimize the tax hit in the future for your kids is to pay for the tax now."
  — Jill Schlesinger [10:25]

• "I think that inherits a Roth asset for your kids is a beautiful gift and it's a clean gift."
  — Jill Schlesinger [08:36]

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Additional Resources

For more information and personalized advice, listeners are encouraged to visit jillonmoney.com, where they can access blogs, radio shows, videos, and subscribe to the free weekly newsletter. Additionally, premium content and live webinars are available through the Jill on Money Live subscription service.

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This episode of Jill on Money provides valuable insights into efficient retirement planning and inheritance strategies, emphasizing the importance of informed decision-making and personalized financial strategies.

Transcript

[Jill Schlesinger]

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[Dan]

So.

[Jill Schlesinger]

So go ahead, take your time to rest and recharge. Because while your money doesn't need a work life balance, you do make your money hustle with Betterment. Get [e-mail] that's B E T T E R M e n t.com Investing involves risk performance not guaranteed.

Welcome to the Jill on Money show. It's Monday, March 31st. Oh, the end of the first quarter. Didn't that go by quickly? Yes. Yes. When the gushing news flow just smacks you in the face for 90 days, yes, of course things go by very quickly. If you are feeling a little overwhelmed by something in your own financial life or you're trying to make sense of maybe policies and how they might impact you, or you're just scared, or you're just feeling great. Whatever it is, get in touch with us. Go to jillonmoney.com, click the contact us button, write us a note and if you wanna join us live, check the box and Mark will do everything else while you're on the website. Don't forget of our content lives there. They've got. They. We have blogs, there's a radio show, there are videos, there's resources. You can sign up for our free weekly newsletter. Everything [e-mail] so just bookmark it and it'll be there for you. Today we are talking to Dan, who joins us from Seattle. Hi, Dan. How are you?

[Dan]

I'm good.

[Jill Schlesinger]

What's shaken? How can we help you out?

[Dan]

Well, my wife passed away about a year and a half ago, and we never evaluated our wealth, and it was, like, amazing. I'm set.

[Jill Schlesinger]

Okay, good. I mean, bad that she died, but good that you're set.

[Dan]

Right. So I'm kind of investing for my kids. Everything I do, I think, well, I don't need the money. And unfortunately, we didn't convert to Roth IRAs, so I've got, like, about, I don't know, 2.4 million in a traditional IRA.

[Jill Schlesinger]

Okay.

[Dan]

I'm 70, so I'm starting. Have to start taking it out in about, what, three years or so. So I'm trying to find a way to minimize the impact for my kids. So this is money that I don't need. What are they called? RMDs? Is that what they're called? I have to start taking money out. And my insurance agent said, hey, we've got this variable annuity with a death benefit that kind of guarantees that you've got a death benefit and it unencumbers your Iraq obligations. I thought, well, that sounds kind of.

[Jill Schlesinger]

Cool, but hold on a second. What do you mean by that? Meaning that you'll spit. It'll spit out the RMDs for you automatically from the contract.

[Dan]

It does. And then. But. But then the death benefit is always there at the same value as. As my purchase price.

[Jill Schlesinger]

Okay, but wait a second. Wait a second. I want to go back for a second. You're 70 years old. You got 2.4 in a traditional IRA, which is nice. It's a good chunk of change. But that doesn't sound like all the money you need forever. So what else do you have?

[Dan]

Social Security provides me with about 35,000 a year.

[Jill Schlesinger]

Okay.

[Dan]

And I've got rentals. That's about 75,000 a year.

[Jill Schlesinger]

Oh, wait, you have rental properties that have that net to you? 75 grand?

[Dan]

Yes.

[Jill Schlesinger]

Okay, 70 grand. Okay, got it. How much are the rental properties worth?

[Dan]

About four and a half million total. There's five properties.

[Jill Schlesinger]

Okay, well, that sounds good. Okay, so rental properties, no mortgages. Those are all free and clear, or.

[Dan]

They'Re all Free and clear. All free and clear.

[Jill Schlesinger]

All right, so on the 75 rental and the 35 Social Security, is that enough money for you?

[Dan]

I could live on 50.

[Jill Schlesinger]

Get out of here.

[Dan]

And I do. And I do. I don't have any expenses.

[Jill Schlesinger]

So you're a net saver on the income you receive already?

[Dan]

I am.

[Jill Schlesinger]

Okay. How old are your kids?

[Dan]

26, 27.

[Jill Schlesinger]

And they're launched, Doing okay. Like what's their situation?

[Dan]

One's launched and the other one's still struggling a little bit. So I still help with him a little bit.

[Jill Schlesinger]

Okay, and are they living with you or are they on their own? Living somewhere else on their own. Okay, so 2.4 in traditional IRAs, 4.5% in rental properties. What about non retirement assets? Any. Any other money that's floating around?

[Dan]

Yeah, a brokerage account that has about $3.5 million.

[Jill Schlesinger]

It's really sounds. You poor thing. Okay, wait. But it's not a bad problem to have, right? Let me ask you a few more questions. So are you charitably inclined?

[Dan]

Well, somewhat. I just am always hesitant because I hear with charities how much goes to administrative, I do a ton of personal volunteering and stuff, and I know that's not enough. It has nothing to do with what my assets are. So I do plan on doing something, but it's not an active plan.

[Jill Schlesinger]

Okay. I would like. Okay. The reason why I'm asking that is that once you turn 70 and a half, you can divert some money from a traditional IRA and send it to a charity. Number one, it could reduce the total amount in that traditional ira and it can also eventually help satisfy your rmd. So that's one thing to consider. But if you're not that into it. Of the brokerage account, the $3.5 million, is there money that's like, is it all low basis stock? Is it all low basis funds? Or is it, are you managing like, what's happening inside that brokerage account?

[Dan]

It's mostly a fan card. This is all stuff my wife set up and it's just been kind of plugging along on its own.

[Jill Schlesinger]

Okay. Why not? Instead of actually buying a product that's going to cost you? I just. You mentioned the name of the product in your email, so I just was able to look up kind of a little bit more of the fees, which, you know it's going to be about 2% a year. There's no real reason that you would have to pay 2% a year to an insurance company. Your kids are going to get plenty of money. Why not just convert some of the traditional IRA with the money that you have in the brokerage account?

[Dan]

Well, you're one of my references. I have an appointment with my accountant next week to discuss how all that might work.

[Jill Schlesinger]

I think that could be a really interesting idea. I mean, are the rental properties all going to be held as is? Are you going to try to sell a few? Like, what's your game plan for those? Because maybe there's cash there also, I don't know.

[Dan]

Well, my game plan is to let the. When I pass, have the. What do they call it when you die?

[Jill Schlesinger]

The step up in cost.

[Dan]

Step up and let my kids take advantage of that. And so I just kind of. I'm not going to buy any more properties. Just keep it as it is and let them benefit from this. Unless I have some catastrophic health issue where I could sell one of my properties to support that.

[Jill Schlesinger]

Well, you probably won't need to do that. I would talk to your accountant instead of buying an insurance product. You don't actually need to do that. I mean, you have plenty of money. It complicates your. It really does actually cause further complication, and I'd rather you have the ability to just grab that money and have that money. I wouldn't. I mean, how much money are they saying they want you to put into this annuity product?

[Dan]

Well, of course, as much as I.

[Jill Schlesinger]

Yeah, that's already why I don't like it. Yeah, because it doesn't. I don't see why that makes sense. Because you're not converting. Your kids would be better off inheriting a Roth asset. Right, Right. You have the. You have the ability to make that happen for them rather than give them an insurance policy. I'd rather you inherit a Roth asset anyway. And also especially because, as you said, you don't really know. Like, you could live 20 more years. You don't know what's going to happen with these kids. Why would we tie up this money? Like, maybe both these kids are going to get married and you're going to have grandchildren and you're going to want to give them money. I mean, like, there's so many things that could happen here. I don't think I would. I personally. Unless, you know, like, if the annuity were a way to solve a problem. I think that I'm open to it, but there's no problem here. The fact that you have to pay money in an RMD is not the problem. The problem is that you actually have the money to convert. So now we just have to convert and pay for it. Talk to your accountant and talk about a qcd, a qualified charitable distribution. But I would just take some of the money out of the brokerage account and start converting some of this money. That's to me a much better idea for your kids considering that so much of your net worth is in real estate. Right. And that you have this ability to pay for a total. I mean, it's just so cool that you have, you're young, you sound healthy, that you can convert this money. That's a huge advantage to you.

[Dan]

Well, you're kind of confirming my suspicions about all of this. It was just something that she offered and she's very honest and down to earth. And I can't avoid taxes. I got to pay taxes on this eventually. But it's my avoidance of that. How can I minimize that? But that should be secondary.

[Jill Schlesinger]

It sounds like, well, put it this way, the way that you can minimize the tax hit in the future for your kids is to pay for the tax now. That's the way to do it. And you know, if you look at your, when you go to talk to your accountant, I'd be interested to see what tax bracket you're in. Cause you live in Washington state, so there's no state income tax. So I mean, I know you make a lot of money from the rental property, but you also have a lot of write offs associated with that. So my guess is that, you know, of your 110, I'm sure the brokerage account will spin off some money. But if you're a single person and you're sort of, I don't know, maybe your highest tax bracket is 24 or 32%, maybe you say, all right, I'm just going to start pulling some money out and converting and getting this, getting it done. I don't know what I feel like that having that Roth asset for your kids, that's the gift. That to me is like a beautiful gift and it's a clean gift. That's the other thing. Right.

[Dan]

Okay.

[Jill Schlesinger]

Presuming that that works for you, then you just want to talk to the accountant about a game plan for how you get it done. And maybe it won't all happen at once, but I don't know. I think that that's, that would be my goal. That's what I would try to do for sure. And then maybe like loosen up a little bit on the charity. Do some, you can do some research about charities. You can go to Charity Navigator, go to one of those, what's that called? GiveWell. And you can start to say, like, hey, what are charitable organizations that I like that don't have, you know, all the money going to overhead? They, they list it all. If you want to have, you know, a little bit of research, if you are at all inclined. I don't want to like, as, as a friend of the show, Ed Slott likes to say, like, I'm not going to make you charitable if you're not. But if you happen to be charitable, then that shouldn't be a limitation. It should just be. I'm going to do a little homework and make sure the organization is running smoothly and I feel comfortable giving to it. If you need any help, let us know and let us know what the accountant says and you can check back in with us now. By the way, I presume you have all of your estate documents done.

[Dan]

Yes, I do.

[Jill Schlesinger]

You're good. All right, listen, I'm so sorry that all this money has fallen into your lap, but you and your wife did a great job and I think. Plow forward, man. Use your money. Spend a little more money, will you?

[Dan]

Okay. Appreciate your kind words.

[Jill Schlesinger]

All right. If you've got a question, it's an estate question. You've got a question about how to manage retire retirement accounts. If someone is pitching you a product, an insurance product, a complicated. Maybe it's a real estate investment, maybe it's a limited partnership, anything like that. Get in touch with us. Go to jillonmoney.com, click the contact us button, write us a note, let us know if you want to join us on the air Live. Don't forget, on the website, you can subscribe to our service called Jill on Money Live. That's where you have access to quarterly live webinars, four of them, bonus audio and video content, the back catalog, all for 45 bucks. For the next 12 months, you can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Try to do something nice for someone else today. Change your work, change your wealth, change your life. Thanks for listening. We'll talk to you tomorrow.

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