One of my producers brought a case in last week that really made me think.  For once, the clients are healthy, so what, you ask, is making me stop and think?  Two things.  First, the clients are looking to the producer to help them pass as much as they can to their kids.  They do not anticipate needing the $600K or so they have managed to accumulate in qualified accounts, as they have both worked for a government agency for a long time and will receive a healthy retirement income.

Of course, that by itself is a pretty easy thing to get done.  Maximizing qualified plans through the purchase of life insurance has been around longer than I have.  What is there to think about?  How about the fact that the qualified account is really their only liquid asset.  What if we execute on an asset transfer strategy and something goes wrong?  What if they want to unwind it and use some of the money to live on?  That is a little bit more difficult, and why I had to stop to consider the right path.

Our ultimate recommendation to the client had three facets that were all included to build a number of "bailout" points into the plan.  Here's how we did it:

• Rather than go straight into a SPIA, move their qualified account into a deferred annuity, capturing a 7% bonus.
• Fund a Long Term Care policy on each of them (as this would be one of the major risks that could cause them to unwind this entire transaction) using MoneyGuard from Lincoln on a 10 pay basis.  The new contract offers a full return of premium even on the ten pays now (this version not yet approved in all states).
• Fund a carefully selected survivorship contract on a ten pay basis

The first year premium on this design comes from re-allocation of current 403b contributions and a small withdrawal from their qualified plan prior to purchasing the annuity.  At the end of the first year, we can elect to either take a withdrawal from the annuity or annuitize over the next nine years.  The plan is to annuitize, but if something has changed in the intervening twelve months, this would be the first "bailout".  The premium for the survivorship policy would be gone, but the client would receive 100% of the LTC premiums back, and still have the qualified account worth very close to the $600K it was to begin with.

Assuming we stay the course at the first anniversary and annuitize the account to pay the remaining nine premiums, we still have a choice to make each year - continue to fund the LTC, or punch out and keep the income that would have paid the premium.  We'll call these eight anniversaries bailout number two, collectively.  This brings us to the third and most important bailout point: the tenth anniversary.  What about all the money paid for the survivorship contract?  Well, for that we used a contract with a liquidity rider that allows for 95% of premiums paid at surrender or exchange at the 10^th policy anniversary.  

The moral of the story?  The $600K qualified account accomplishes the following:

• $150 per day LTC benefits for 7 years with full return of premium on both husband and wife
• $1.2 mil of survivorship coverage
• An additional $324K in death benefit from the LTC policy if they don't use the LTC benefits during their lifetime.
• That is a total of over $1.5 million transferred tax free versus $600K taxable in year 1!  How long would this account have to grow to reach that if it passed as a qualified account?!
• If they get to the tenth year and the need assets to provide retirement income rather than passing it to the next generation they can pull $460K back from these three policies!
• This was all funded with net after tax distributions, so their lifestyle isn't impacted.

Bottom line, as much as some of these moderately well off Boomers may want to pass their assets on, the downside risks can be a little much to swallow.  Smart planning can accomplish the asset transfer with a parachute.   

Give me a call if your next client could use a creative solution to their planning challenges.