When Trust Requires Too Much Information

Q. I am in the process of helping my in-laws get revocable trusts and in the process the financial planner of course starts to make suggestions. One of them is the Master Dex 5 Annuity issued by ####.

They definitely will not need the money for 10 years and their current return is in the 3-4% range due to their conservative nature could this not make sense?

A. I think you need to be very watchful here. Is the financial planner assisting in getting the trusts?

Did you or the in-laws go to the planner or did the planner seek you/them out (seminar or otherwise)?

Regardless, it throws up all sorts of red flags when you seek help with one issue and receive investment recommendations along the way. Many financial planners (and banks and wirehouses) use the estate planning/living trust process as a means to find out about all of your assets and to gain your trust through the process. They then take that information and try to generate additional commissions on the investment side.

In fact, it is widely taught that when going through the living trust process it is easy for an 'advisor' to get the 'prospect' to divulge all of the information regarding their investments. Few people know that the advisor really doesn't need to know that information to provide assistance with a living trust. Besides, the advisor can't make the determination that you need a living trust anyway--it must be done by an attorney.

When dealing with trust issues, all that the advisor and/or attorney needs to know is the total value of the estate and what portion of that is in pre-tax qualified money (company retirement programs, IRAs, etc.). If they are asking you for any additional information it is because they have another agenda. That agenda is to sell you an investment.

This coupled with the fact that one of the highest commission products is being recommended would greatly concern me. Regardless of whether they will need the money or not for ten years, there are better investments available that don't force them to stick with it for a set number of years. The only reason there is a surrender penalty on annuities, anyway, is so the insurance company can get back the money they paid the agent in commission.

You can look at the first year's surrender penalty and get a good idea of what the agents commission is. It wouldn't surprise me if the commission on the #### Master Dex 5 was close to 10%. Such a high commission creates a tremendous conflict of interest. Did the advisor mention how much he/she will make on that suggestion?

There are several articles on my website under annuities that talk about EIAs and why you should be concerned.

If you have any other questions, just let me know.

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Sometimes Youth Makes For More Affordable Aggression

Q. Two years ago I was just out of college and went to my bank to open a Roth IRA. I knew very little about investing but suggested to the bank's financial advisor I was wanting something like an indexed mutual fund and was just going to let the money sit there for thirty years. He suggested this #### Growth Fund instead. I said sure and later found out he put me in a variable annuity with this #### Growth Fund.

From what I can figure out, this seems to be a poor choice for me, but not for him. Is there any way I can redirect my money in a few more years to something else (i.e. a low fee index fund) and still keep it in the Roth and not have to pay any penalties? Or can I and should I just get out of it now with applicable penalties?

The amount is only $3000. Thanks for your time in answering this. I guess it's better to learn a lesson with $3000 at 26 then $300000 at 66.

A. Even though you had to pay a commission to get ####, it is an excellent mutual fund that consistently beats the S&P 500. The internal fees on this fund are almost half of what they are for most actively managed mutual funds. You probably won't see this fund on the top ten list, but it will always stay in the top 25% of it's category.

Let's see what will happen to that $3k if it earns only 7% per year...
7 years = $6k
14 years=$12k
21 years=$24k
28 years=$48k
35 years=$96k
42 years=$192k
49 years=$384k

At 10% it's considerably better. I would not be concerned if I had my Roth money in #### and expected to be able to leave it there for 10-20 years. You will be happy.

Let me give you another one. Since you are so young and will not be depending on this money for income you can be more aggressive with it. What do you think the chances are that the S&P 500 will be higher 10-20 years down the road? The probability is about as close to 100% as you can get.

If that's the case and you believe it, then take a look at #### if you make a contribution this year. #### is designed to produce 200% of the daily return of the S&P 500. So if the S&P 500 goes up 10%, #### will go up 20%. Don't bet the farm on it, but with your time-frame it will be hard to lose. The only caveat is that you will have to have the stomach to hang on to it when the S&P 500 is down 10% and #### is down 20%. You are concerned about where it will be in 10-20 years, not 10-20 months.

Thanks for your question!

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Stock "Options" - Knowing When to Sell

Q. My husband and I bought 225 shares of Preferred Stock with #### for $25.20 a share on November 17, 2003. We also bought 225 shares of preferred stock with #### at
$26.50 a share on the same day.

This is money we will use to buy a car next June or July 2006. Both of these companies are not doing well financially and we are worried about our money since we will need it in a year.

Our Financial Advisor told us the only way we would lose money on this would be if the companies went bankrupt, but I'm not so sure that is the case.

Should we leave it where it is or take it out and take a loss now since the price of the shares are down about $2.00 each? Thank you.

A. First, find a better financial advisor! It seems that many advisors are great about telling you what to buy but are terrible about letting you know when you should sell. I make both kinds of decisions for my clients.

Second, #### has had a lot of bad news recently and their debt has been downgraded. Much of the bad news is probably already in the price of the preferred you own. If #### were to come out with new models that people actually want then you might see the stock recover. If I remember correctly, the change that I am talking about won't happen until the 2007 model year. If #### is successful negotiating for lower health care costs with their union then you might see a bump there as well.

####. I really don't know enough about this one to give you an opinion.

Your timeframe is short enough that it limits your ability to recover. It also comes down to your comfort level. If the fear of losing any more money on these is greater than the desire to take a chance and see it they come back, then you should go ahead and sell them. If you have other assets that can offset further losses then you might want to hang on and see if they partially recover.

A third option is to sell off a portion of each now and hold a portion and see what happens. Set a downside limit for yourself that if the remainder drops to that point you will sell no matter what. That will give you the peace of mind that your downside risk is more limited.

Lastly, if you have other investments, you will be able to use any losses on these preferreds to offset future gains. I know that's not the greatest but it's better than nothing!

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Annuities - Getting Out Before It's Too Late

Q. My husband and I signed on with an #### Financial Adivsor. Although we knew he was working for fees and commission; we trusted him and belived he would not steer us wrong.

At our second meeting with him he sold us two annuities (one for each of us) to the tune of $112,000 - rolling over our 401K's - I can't believe we signed without researching, but we did. I came home and researched - now we want to stop the transaction. I called his office, but I got his voicemail. I sent him an e-mail as well.

I read from the securities and exchange website that most annuities have a ten day (or more) free look period during which you can get out. I pray this is true for the one we signed - we didn't even read it; this type of action is so unlike us!?!

Please help? What should we do? And finally, should we consider our initial $500 fee a loss and leave this advisor? How do we find a good one in our area that is fee-based and trustworthy? We really want to find someone for life - we are in our early forties.

A. Your experience is typical. Regardless of what commission-based firms say about their financial plans, they are just a tool they use to sell you more product. They charge you $500 so that you will think their 'plan' is more objective, but it isn't. Frankly, you can get the same plan free at many banks because they are using it to sell you products too!

All variable annuities will have at least a 10-day Free Look Period and some have a 20-day period.

Yes, you should keep your money from going into these annuities. The internal fees are significantly more costly and provide little if any benefit to you. Your email should serve as proof, but I suggest continuing to get the advisor on the phone. You can also fax him a letter clearly stating that you want out under the Free Look Provision. If there is any number to contact the annuity company directly, call them and let them know and fax the letter to them as well.

The main thing is that you want to document that you sent them the message before the time period is up. If you talk to the advisor, have him send you an email verifying that he has been told of your wishes. An email with a 'read request receipt' is a second-best option.

These monies will need to be kept within an IRA so that you don't have to pay taxes. If you don't know where you want to transfer the money to you can have #### hold it in an IRA account but they will then probably charge you $75 to close it when you transfer the money a few weeks later. I do recommend you find another advisor. Once you do, you can set up an account and the #### annuity company will have a form that you fill out telling them who to transfer the money to.

As far as being able to recommend an advisor in your area, I can't because I don't know any personally. There are very few advisors I would recommend across the whole nation. In fact, if I were to die I would suggest my wife manage the life insurance proceeds on her own. Of course, since she is actively involved in all the articles I write, she has a pretty good knowledge of the industry and investing.

I will be happy to discuss this with you further and give you some ideas.

. . . . . . . . . . . . . . .

Postscript:

Jeff,

Thanks for your quick response.

My husband and I drove over to #### and retrieved our original documents this morning. The advisor brought in his boss to continue the sales pitch, but we simply told them we wanted to look everything over and think about it first. The advisor stood to take copies of our paperwork, yet I informed him that we would feel better if he didn't. And I do feel better - we have our originals and time on our side.

I will discuss your letter and offer with my husband this weekend (with us both working long hours we are like two ships passing in the night,) and let you know if we would like more information.

Thanks again, for your quick response and your wonderful website.

- - - My pleasure. I'm glad it worked out well and am happy to help any way I can...Jeff

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Long Term Care Insurance - How Necessary Is It?

Q. The question I have is about Nursing Home Insurance. My husband and I are in our mid-sixties and are both in good health. He is still working full time because he enjoys his work. We are being bombarded by people trying to sell us Nursing Home Insurance. They all want to come out and talk to us, etc.

We are financially secure and plan to be for a long time. Should we start buying this now? Thanks. Hope you do come out with a book. I would buy it for all of my children who are grown and married.


A. I have a couple of articles about long term care insurance on my website that you will find helpful. Look under the insurance section at www.guardingyourwealth.com.

That being said, there are two ways to view long term care insurance.

If you have several hundred thousands of dollars in investable assets then you will be able to pay for home health, assisted living and nursing home care yourself. In this situation, I view long term care insurance as inheritance protection insurance. For a fixed expense you are able to insure that your estate will not be decimated and can pass to your heirs. If this isn't important to you and you are comfortable spending down your assets if needed, then you don't need long term care insurance.

Those with few assets don't need long term care insurance and probably can't afford it anyway. People in this situation will end up relying on the government to provide care.

It's those in the middle that are most at risk. You have enough in assets to live comfortably, but not enough to cover a couple hundred thousand dollars in long term care expenses without affecting the other spouse's standard of living. For people in this situation, long term care insurance provides the peace of mind that the help will be there when needed and that the other spouse won't be impoverished.

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Minimizing the Cost of Selling Real Estate

Q. I am selling 2 acres of land. How do I avoid paying taxes on it? Help Please.


A. You are only taxed on the gain from the sale. So if you paid $10,000 for the land and sold it for $20,000, the profit of $10,000 will be subject to capital gains taxes. The capital gains tax rate will either be 10% or 15% depending on your income level.

The only way to push those taxes down the road is to 'exchange' that property for another. This is called a 1031 Like-Kind Exchange. There are a lot of rules about doing this and it needs to be put into place prior to the closing of your land.

Take a look at the article on my website called "Exchanging Real Estate Tax-Free". It will answer many of your other questions regarding taxes on the sale of real estate.

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Another Taxing Question for Beneficiaries

Q. Does a benificiary of an annuity or life insurance have to pay taxes upon the death of the benefactor? If the answer is yes, how is it calculated.


A.The beneficiary of a life insurance policy does not have to pay taxes on the proceeds from the policy. The beneficiary does have to pay taxes on an annuity.

For instance, let's say your parent put $100,000 into an annuity and through some miracle it is now worth $200,000. When the parent dies, the taxes on the gains of the annuity have to be paid. Gains from an annuity are taxed as ordinary income so in this situation, $30,000 - $40,0000 could be lost to income taxes.

Additionally, the full value of the annuity ($200,000) plus the value of all life insurance owned by the parent are included in the value of their estate. If the value of the estate is greater than the Federal exemption (currently $1,500,000), the excess is taxed beginning at 37%.

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Well Grounded Second Thoughts About Equity Indexed Annuities

Q. I'm 36 years old and have had a "Financial Advisor" for several years. He works for an insurance company and several years ago sold me a TSA indexed (S&P 500) Annuity. I'm now having serious second thoughts about it having read all sorts of negative press about indexed annuities(and learning more about them).

I have about $15,000 in the annuity and used to contribute $250 a month to it that I've recently cut to only $100 a month. I really think my money could earn more elsewhere. The policy has a 15 year waiting period for BAV and the floor is 0.00% for all indexed accounts. Should I quit contibutions entirely and have this be an expensive lesson? Your advice would be most welcome.


A. I commend you on doing some additional research and for rethinking previous decisions. When making investment decisions, it is very important that we look to previous decisions and learn from them so that future decisions can be better. Don't give yourself too hard of a time about the EIA investment you made all those years ago. At the time you were making the best decision you could based on the available information.

That being said, there are several problems with the EIA for someone your age. First, on any tax-deferred products (where you are pushing the payment of taxes into the future), the IRS charges a 10% penalty if you take your money out of that type of product prior to age 59 1/2. Putting someone in their 30's into one of these products unnecessarily ties up the money and severely restricts your options. This money can be moved between annuties through what is called a 1035 exchange, without triggering the 10% IRS penalty.

Second, the performance issue. That's probably all I need to say about this one! When the markets were going up like a rocket your participation was probably limited, while you didn't earn anything during 2000-20002.

Third, in all likelihood, each monthly contribution will have it's own surreder period! If there are ten years of surrender penalties, every time you make an additional contribution, that contribution is locked in for the 10 years.

What should you do?
Stop making the monthly contributions. Put your money into something that gives you complete flexibility and control. I recommend something like a well managed mutual fund or an index fund.

Secondly, each year take out whatever you can penalty free from the annuity. You will have to 1035 this money into another annuity but you can find better ones that have lower expenses and better investment options. Vanguard, for instance, has low-cost variable annutiies that you can use.

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Equity-Indexed Annuities - Understanding Regulations

Q. I read your article about equity-indexed annuities. I am a student and this is a very basic question that if I look you may have already answered. What laws are being broken when a broker makes these transactions where the firm cannot defend? Thanks.

A. I'm not sure if you would refer to a regulation as a law. The SEC and NASD have oversight responsibility for the sale of securities. For the studious, the SEC derives it's authority from the securities laws of 1930 and 1933, which were put in place to put an end to many of the egregious practices that resulted in the stock market crash of 1929 and the subsequent Great Depression.

The Investment Advisor Act of 1940 further defines actions by investment advisors.

These regulations clearly state that an investment must be suitability (it's called the suitability requirement). That is the area in which the NASD is most interested in the actions of agents/broker/advisors relevent to EIAs. If an advisor is moving a client out of one high-commission product and into another and the client is paying a penalty to get out of the one and into the other, there may be a question of suitability.

If an advisor is recommending that a client invest to large a percentage into an EIA based on the clients age, needs, etc, there could be a question of suitability.

If an advisor is recommended a long-term product like an EIA to an 80-year old, there might be a question of suitability.

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A Fellow Advisor Comments On Regulating Equity Indexed Annuities

Q. Hey Jeff, I loved your article "Regulations Ahead for EIAs" published June 15, 2005.

The only question I have is whether RIAs or non securities licensed insurance agents will be the target of the NASD or SEC? It's been my observation that these non securities licensed agents misrepresent/mislead the public with what an EIA's returns will be over time and compare them to mutual funds and variable annuities. I think an EIA could be used instead of a CD (assuming a 5 yr maturity) but they are not designed to compete with mutual funds and VAs the way these insurance agents do. Thanks for such a great article that is exposing the abuses!

Have a Great Day!


A. Wonderful point! I don't care who is offering EIAs, if they are being promoted as a CD alternative that will give the return of the markets with no risk then the advisor needs to be investigated!

The NASD in their recent report says that they have jurisdiction any time there is a problem with an unsuitable recommendation, so RIAs who are selling EIAs under an insurance license may be opening themselves up to potential legal liability.

Additionally, if these become classified as securities then fee-only RIAs will no longer be able to offer them.

Thanks,

Jeff

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Investment Recommendations for Providing Significant Capital Security and a Decent Return

Q. I would appreciate specific investment recommendations for my 72 year old mother that would provide significant capital security with decent returns.

A. I will be happy to offer some suggestions, but I need to understand more about her situation.

Does she need to use income off of the portfolio? If so, how much per year?

How has she invested in the past and how is she currently invested?

Is this retirement or non-retirement money?

How much does she have in investable assets?

Is she wanted some growth or just stable interest with no principal
fluctuation?

Q. Thank you so much for getting back to me. My mother only uses money from her portfolio when unforeseen expenses (large) arise- doesn't take regular monthly withdrawals. Actually, we might want to budget 5k or so annually, just in case. She has 45k in a 7 month CD, 80k in a variable annuity, 30k in another variable annuity and 30k in an IRA(only retirement money out of all of these rolled over from a 403k). Her monthly income is about 3k. As I think I said, she's 71 in pretty good health except for back/hip pain and she has a long-term care policy. She wants a little of both- steady interest with modest risk/potential for some growth. Guess we're looking for a happy medium. By the way, I have her IRA in a highly rated bond mutual fund- just moved it there. I've done a lot of research on "safe" mutual funds but I’m having a lot of difficulty sifting through these and making final determinations and levels of diversification.

Thank you for any advice on specific products/diversification you might be able to provide.

A. I have several comments.

First, she has way too much money in Variable Annuities. Unless she has
Been in them for 10 years and has great gains, you should look at moving that money out of those as soon as possible. If there are still surrender penalties then take the 10% per year they give you as a free withdrawal and move that money elsewhere.

Secondly, it sounds like she only has 25% in short-term investments
Like CD's. A CD is significantly different even from the best bond fund. I would use some of that Variable Annuity money to increase her CD level. Bond funds, in my opinion, are not the best place to be in a rising interest rate environment. I would put that money in CD's as well. It will keep it from losing money and will give you some interest while we wait for interest rates to move up over the next year or so.

You mentioned that she is willing to take moderate risk for a little growth.

I use a strategy of higher-yielding stocks, closed-end funds and foreign securities that are paying dividends of 6-10%. There is some fluctuation of principle, but if you get 8% a year in dividends that helps offset any fluctuation. These should be seen as a 5 year hold.

There can also be about 25% in growth-oriented equities. The problem
Is that there is a substantial risk of loss in equities even over a 5 year period, so you will have to monitor them closely and be ready to take action to protect the money. For mutual funds, I like Clipper Fund and Dodge & Cox as some good all around large caps.

For mid caps I like Calamos Growth. You can also use some low-cost
ETFs. IJH for mid-caps, IWM for small caps, EFA and EEM for international. I use these on a daily basis for my clients, but I actively manage them.

I've developed a proprietary system that is designed to significantly
Reduce the potential for loss so that people don't have to worry about taking the huge losses they suffered in 2000-2002.

I hope this helps!

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The Difference Between Investments and Roth IRAs

Q. Dear Jeff,

I wrote to you about a month ago asking about more details regarding EIA's and you encouraged me to read your articles-which I did. I have $11,000 in a Roth IRA with my credit union which earns a 2.2% interest rate. I have been researching rolling over my current Roth IRA into a #### account which may invest a bit more aggresively than my credit union. However, there are all types of retirement accounts through #### and I'm more confused than ever. Should I just roll over my account into another Roth IRA? What would the benefits of this be? Or would a #### Target Retirement Fund be better?

I'm looking to earn a bit more interest on my account. Any advice you can give me would be much appreciated. Thank you so much. I really enjoy reading your weekly newsletter!


A. It's good to hear from you again.

I think your difficulty comes from confusing the difference between a type of account and an investment.

A Roth IRA is not an investment, it is a type of account. You can own just about any investment within a Roth IRA. This issue is confused because some banks and credit unions refer to a Roth IRA that is invested in a CD as a Roth IRA. It's not. The Roth IRA is the type of account at the bank. The CD is the investment within the Roth IRA account.

Think of the Roth IRA as an umbrella that shields the investments underneath it from the rain of the tax-man. The R-IRA is just a wrapper. By itself it does nothing.

The #### Target Retirement Fund is an investment. You can invest money from whatever type of account you have in the #### Target Retirment Fund.

The #### Target Retirment Fund could be fine because it allows others to make the decisions of how much should be in each category, freeing you up.

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The Disappearing UGMA Account

Q. I have hit a brick wall. On July 1, 1982, my grandmother opened up two UGMA accounts. One for myself and the other for my cousin. He received his account and I did not. The account is with ####. I was born in 1968 and would have turned 21 years old in 1989. The account was never turned over to me and somewhere around June of 1994 it was turned into a Joint account with my mother that needed two signatures on it. Also up until 2000 there is #### listed on my taxes but according to #### now I never existed, the account never existed and they cannot find me under my Social Security number. I only exist as POD on my mothers account. Yet they were still on my taxes up until 2000. The significant event in 2001 was my marriage to my husband whom they hate.

At this point Mr. Voudrie, where do I go, what do I do and what responsibility does #### have in all of this. They say they cannot help me because I cannot produce an account number yet they were able to get me this far in '96 yet I always hit dead ends. I am now 36 for another week with a terminal health condition that is not operable and I am in need of the funds that was rightfully mine and should have been turned over to me when I came of age.

Thank you so much for your assistance with this matter.



A. The first thing you have to do is to try to find a way to prove that there was a UGMA account set up in your name and your social security number. Do you have a #### statement that shows the account title on it?

You mentioned that it was on your taxes for several years. Do you have a copy of the 1099 that would have been issued...no one would have put it on your taxes without a 1099?

If you have a 1099 from #### that shows the account, that should give you the proof to go back to ####. With a UGMA account, it automatically becomes yours on your 18th birthday. In fact, I don't believe that #### could accept any instructions on the account from the prior custodian after you were 18. If so, they should be liable.

It will all be based on your ability to prove that the account existed. You will need to determine if the amount of money in the account justifies going to the expense to try and fight them.

Contact the NASD and see if they will help you in dealing with ####. If you have proof the account existed then I would contact a compliance officer at ####. Explain that unless the problem is rectified and your money returned that you will pursue legal remedies. If they don't do anything you will need to get a lawyer involved. The lawyer could subpoena records from your grandmother and ####. I imagine that will get expensive, but it is worth looking into. You may be able to find a lawyer that would accept the case on a contingency basis where he/she would receive a percentage of the account if you get it.

Let me know how it goes.

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Living Trust - Determining the Need

Q. My husband, a pharmacist, is almost 70 and we will soon have to draw out from our IRA. Our financial advisor is helping us plan how best to plan for retirement. We own our home and cottage on an acre of land. He and I both have a ten year term life policy. I have a 91 year old aunt that has me as heir and executor of her estate at the time which is appraised a little under $200,000 (property and house) and probably $100,00 in savings and bank account.

I believe that it would be good for us and her to have a living trust. Of course, we have a will that was recently updated as was my aunt's after the death of her husband. My husband is still working as it would be hard for us to live just on our Social Security checks. Our IRA lost more than $20,000 a couple of years ago. Our financial advisor is checking on that to get us in less aggressive funds. He has suggested that my aunt have a living trust. I would like any other suggestions that you might have. I have read all articles on your site and have printed most of them. Thanks for your helpful site.


A. There are several issues that are raised in your question.

Concerning a living trust...It is almost always easier to settle an estate that has the assets in a revocable living trust. Without a trust, many of the assets will have to go through probate which will increase the time required and add to the headaches. If you aunt had her home and bank accounts in a living trust and you were named as the successor trustee, the settlment of her estate will be much simpler.

For instance, you could use the funds in the trust bank accounts to cover funeral expenses, pay for ongoing bills and to fund any needed repairs on the house. You could place the house on the market and sell it right away. Available funds could be distributed from the trust to its beneficiaries very quickly. You will still need to file a state and federal tax return on her estate but that is done fairly simply.

All these things I just mentioned can be done without the need for a lawyer. You will need an attorney to be involved in the initial drafting of the legal documents but not in the settlement.

Additionally, if you aunt has her assets in a living trust and she becomes incapacitated, it is very easy for you to step in and manage her assets without interruption or involvement from the courts. That in itself is enough reason to have a living trust!

The downside is that it can be difficult to convince someone of their need for a living trust. Those who are unfamiliar with them feel like they are losing control of their assets, although they are actually gaining greater control. If your aunt is open to the idea of a living trust it might be worth pursuing.

Concerning you and your husband's situation...The investments that you should be in depends on the amount of assets you have and how much income you are going to need from those investments. At age 70, growth probably shouldn't be as high of a priority because of the risk associated with it. You mentioned that you lost $20,000. It's going to be very difficult to earn that back.

It may be more important for you to hang on to what you have and to use lower risk income oriented investments. There are many different options where you can earn more than on a CD but without taking the degree of risk you currently have in the portfolio. Unfortunately, your advisor may not be familiar with many of these opportunities (few are).

I am happy to make additional recommendations, but I will need to know more about your situation. How much do you have invested? What is it invested in? How much income do you want/need to supplement your Social Security? How is you and your husband's health?

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Here It Is - The Million Dollar Question

Q. I may be making this question too general, but this is the first time I've ever had the possiblilty of something like this happening. If someone were to give me a large amount of money, $1,000,000.00 for example, as just a flat out gift, what kind of taxes would I have to pay and are there ways around paying these taxes?


A. First, congratulations! I hope it comes about for you.

Assuming the money is coming from an individual, the answer is really quite simple. There are not any taxes that the person receiving the gift has to pay on the transfer. Gift and inheritance taxes are all paid by the giver.

The only taxes you will need to 'worry' about are any future taxes on the income/earnings off of the $1,000,000.

If the money is being won from a game show or lottery, then there will be taxes due on it. If that is what you expect let me know and I will address those taxes in detail.


Obviously, receiving a large amount of money like that will change your life. There are several issues that you will want to be aware of. If it comes about, feel free to let me know and I can provide additional information. For instance, you will immediately have a target on your back and will be hunted by every broker, insurance agent and financial advisor out there. Moreover, you'll be contacted by almost anyone looking for a handout. You'll even get calls from car salesman, etc!

Let me know if you have any more questions...

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An Agent Asks - What Should I Recommend Instead of EIAs?

Q. I am an insurance agent and have been approached by several companies to sell the Equity Indexed Annuities. I am not a fan at all of annuities, what else could I or should I recommend? Rick



A. Rick, thanks for your email. It is great to hear from other advisors that are more concerned about doing what is right for their clients instead of what is in their own best interest.

For insurance agents, there aren't many alternatives to Equity Indexed Annuities. If you are wanting to help your clients and others with their investments then it is important that you be able to offer investments like stocks, bonds, mutual funds, real estate, etc. This can be done either by getting your securities licenses and being involved with a broker/dealer, or you can become a Registered Investment Advisor and not have the stringent licensing requirements.

The difference is that an RIA cannot sell investment products for commission. You can still keep your insurance license and sell insurance products for commission.

I'd be happy to help in any way I can.

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Is It Your WILL to Tax Your Beneficiaries to Death?

Q. I have inherited my mother's estate. She died in May of 2005.

Her Will clearly states that she expectes me to share the estate with my brothers and sisters, share and share alike.

What are the tax implications for my brothers and sisters who will be receiving these gifts?



A. This is a wonderful question!

If I understand correctly, your mother named you as the sole beneficiary of her estate. When she died, you inherited everything.

Even though she gave you all the money, it was expressed that she expected you to share and share alike with your siblings.

This is a terrible way to do things. If your mother wanted her estate divided between her children, why didn't she just say that in the Will? By not doing so, she has greatly increased the potential for hurt feelings and damaged relations that can last for generations. There are also tax implications that she wasn't even aware of.

First, the money is legally yours and you aren't under any legal obligation to give any of it to anyone. It is yours to do with as you please.

If you chose to gift money to your siblings you can, but you must beware of the tax implications. You can't gift more than $11,000 per year to any one person without it being subject to federal gift taxes. If you siblings are married, that means that you can gift $11,000 to your sibling and $11,000 to their spouse each year without any gift tax consequences. That's on the Federal level.

Although you can gift $11,000 on the Federal level doesn't mean there won't be any taxes on that gift. You need to check with your state to see what their gift tax laws are. For instance, in Tennessee where I live, the state only allows gifts of $10,000 per person. If you gift $11,000 then the state wants 6% of the amount over $10,000.

That means it may take you years If you want to gift a larger amount, whereas that money could have gone to your siblings quickly and easily if it was done through your mother's will.

Another way of achieving this would be for you to disclaim the portion of your inheritance that you wanted to go to your siblings. In most states, the laws of intestate succession state that the portion you said you didn't want will be divided equally between your siblings. It's too late for that.

Your mother has unwittingly and unnecessarily put you in a difficult position. While this is unfortunate for you, your questions may help others make wise decisions regarding their wills before it is too late. Thanks for asking.

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Variable Annuities - A Good Deal?

Q. Dear Jeff, what are the pros and cons of the #### High Five Bonus variable annuity? I have been offered a 5% bonus on a third of my total investments, and I understand that the guarantee does not lock in for 5 years? Is this true? Is this a good deal if I intend to retire and pull about 5-10% per year from the start?



A. As you can tell from the many articles that I have written about annuties, I am not a big believer in the 'benefits' they provide. A variable annuity is the insurance industry's way to compete with mutual funds. Back in the '80s there was a lot of money flowing into mutual funds and very little flowing into traditional annuities. The insurance companies saw this and came up with a way to try to get a piece of the pie--the variable annuity.

In its basic sense, a variable annuity gives you access to underlying mutual funds (they call them sub-accounts). To keep it from being a mutual fund product, the insurance companies had to have an insurance element so they put on a death benefit that guarantees your heirs will earn back at least what you put in should it be worth less than that when you die.

The fees associated with a variable annuity are considerably higher than those associated with investing in a mutual fund. In addition to the fees charged by the underlying sub-account manager, you also pay mortality and risk expense charges that normally are about 1.45% per year. Then they want you to add on all these other benefits that have additional charges and before you know it you are paying 2.5-3%+ per year in fees. That's a deep whole to have to climb out of each year.

The reason an advisor recommends a variable annuity is because he/she will earn more than if he/she recommends a mutual fund. In some cases, substantially more. Of course, they don't tell you how much they will make. They use some line like "You don't pay a commission, I get paid by the insurance company." If that's true, then why do you have years and years of surrender charges if you want your money back?

Likewise with the bonus' offered by these companies. There is no such thing as free money. Do you really think they will give you a 5-10% bonus on your money and not make it up through additional (sometimes hidden) underlying fees? You know they will! So what have you really gained?

I haven't recommended a variable annuity in years. There are just too many other low-cost, better performing options that don't tie your money up long-term and that don't force you to lose your flexibility.

Let me know if you have other questions or if I can be of further help.

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Considering Using 401(k) to Pay Off Home?

Q. I sold my farm 2 yrs ago & put the money into my home using this as my homestead.

I purchased this home 4 years ago but had not paid for it completely. I am now selling it and the home I want to buy costs more. To pay for it I have to close out my 401(k) account which will save me paying interest for years on the home. Your article on taxes however sounds like it may cost me 35% tax which would not leave me enough to buy my home. How does the 10% tax figure in? Thank you for helping to clear my mind. DL


A. How much you will have to pay in taxes when you take money out of your 401(k) depends on your age and your income. Any money that you take out, regardless of your age, will be taxed as Ordinary Income. That means it will be taxed just like it was money you earned from a job. Depending on your income level this could be next to nothing all the way up to 35%.

If you are under 59 1/2, then there is an additional 10% penalty that the IRS imposes. The only way around that penalty is to take a series of systematic equal periodic payments for at least 5 years or until you reach 59 1/2--whichever is longer.

As a result, it may not be in your best interest to pull this money out of your 401(k) to pay off your home. If you are over 59 1/2 and in a low tax bracket then you should be fine. If you are under 59 1/2 then you may want to wait.

Thanks for the question!

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Uncovering The Higher Yielding Investments In Today's Markets

Q. If one is looking for relatively safe good yields today, where do you go? I have used short term bond funds but returns have been disappointing.



A. It certainly has been a challenge for investors needing income the last couple of years.

There aren't a whole lot of opportunities among the traditional mutual fund/bond categories.

After extensive research, I have uncovered some higher yielding investments that I have started to use in my client's accounts. Some are select U.S. stocks, preferred stocks and/or closed end funds, but there are some amazing opportunities elsewhere as well.

For instance, U.S. opportunities are yielding around 10% right now. The conservative investments I've found outside the U.S. that have a stable earnings history and have been consistently increasing their dividends are currently yielding 6-8%. The higher-yielding portfolio of these is yielding 10%+.

Most investors and their advisors are either unfamiliar with these investments or don't even know they exist.

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Equity Indexed Annuities: Lining The Advisor's Pockets

Q. Sir, a local Certified Senior Advisor has advised me to move the CREF portion of my University TIAA/CREF account (about $250,000) into an #### 14 year Equity Indexed Annuity. I am 68 years old and do not need the income now since I have a military pension, social security and a working wife who is an accountant. Have I missed something here, since I am having difficulty trying to see how this is in my best interest? My plan had been to simply take the required IRS Minumum Distribution at the required age.

Is the advisors plan better than mine?



A. Absolutely not!

Trust your instincts--the advisor was out to line his/her pockets.

#### is one of the highest paying EIAs on the market. Your CREF annuity is fine. By the way, I'm a Certified Senior Advisor too. Frankly, it doesn't mean anything. It is a designation designed to give investors the belief that the advisor is specially equipped to serve the Senior market. It took me a couple of days to get this 'advanced designation'.

On the other hand, it takes most people two years to get the Certified Financial Planner designation (CFP)--although I've seen some fellow CFPs recommend people put 100% of their investable assets in EIAs!

You asked if I knew someone you can trust in the MO area. I don't have relationships with other advisors. I do serve a small group of clients who live pretty much all across the nation. Depending on your needs, I will be happy to help you.

If it is answering questions and providing a second opinion, I will be happy to do it for free. The only time there will be a charge is if at some point you need and want my money management services. Regardless of where my money management clients live, I meet with them face-to-face at least once per year--more if necessary.

For instance, I'm flying down to Texas next weekend to meet with a few clients there. Since my overhead is so low, I can charge the same or less than other advisors and still cover all my travel costs.

It sounds to me that you are working with commission-based advisors. They will always have an inherent conflict of interest and it will always be hard for you to know if their recommendation is in their best interest or yours (it's rarely both!). Did the advisor recommending the #### life mention that he/she would probably earn $25,000 if you said yes?

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