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Part II—VA Rescue Program: Receive an Ordinary Income Tax Deduction as well as 110%+ of the CSV

By Roccy M. DeFrancesco, JD,CWPP, CAPP, MMB - Email Editor

Date : March 2, 2010

The program explained in this newsletter is no longer available as of January 2011.

In last week’s newsletter, I introduced to readers a very interesting Variable Annuity (VA) purchase program. The title of the newsletter was: VA Rescue Program: Sell Upside-Down VAs for 110-120% of Their Account Value. To read the newsletter, please click here.


To get the FAQs on the VA purchase/rescue program, please send in a request here.

Now that the VA purchase program is available, a better option for many clients will be to sell their VAs for 110-120% of the CSV AND in the process receive a loss that can be used against ordinary income.

Getting paid when a VA is sold

I forgot to mention a not insignificant point in last week’s newsletter. If you are securities licensed, you can earn a fee of up to 7.5% of the excess price the client is paid for his/her VA. For example, if your client sells a $500,000 annuity and receives a payment of $600,000 ($100,000 more than the CSV), you would be paid 7.5% on the excess payment which would equal $7,500.

Do you need a securities license to deal with this concept?

The answer is no. The firm that offers this program has securities licensed team members who will talk with your clients about it (and will then allow you to deal with the repositioning of the money).

Taking a loss on the sale of a VA

Most people think that, when they sell an investment that is worth less than was paid for it, the loss is limited to a capital loss (short- or long-term capital loss). That’s better than nothing; but when selling an upside-down VA, the loss can be applied to a client’s ORDINARY INCOME. That’s right.

So not only do clients win because they can receive 110-120% of the CSV when selling, but they can also take an ordinary income tax loss. This significantly improves the financial viability of selling an upside-down VA.

Example

Client, age 60, earns $500,000 a year. He bought a VA back in 2002 for $500,000 that currently has an account balance of $300,000. Assume he sells the VA for $350,000 cash.

Outcome: $50,000 more than he would have had if he just held the annuity.

He could then choose to reposition the money in the annuity to a FIA with a 10% bonus with an 8% roll-up rate where at age 70 he would have a guaranteed income per year for life of $72,154 (something he’s never going to have if he stays in the VA). Or, he could let the money grow until age 75 at which time his guaranteed income for life would be $104,682.

Tax deduction—the client would also receive an ordinary income tax deduction because of the $150,000 loss on the sale of the VA. If he’s in the 40% combined income tax bracket, this will save him $60,000 in income taxes (meaning that the sale price was really $410,000).

To read a very interesting/educational article by Motley Fool on taking the deduction on the sale of underwater VAs, please click here.

Summary

In essence, the VA purchase program is a double-benefit program: 1) more cash now which allows clients to reposition money wherever else they see fit, and 2) a tax deduction that can be used against ordinary income.

Do you think clients who have underwater VAs will have an interest in the VA purchase program? Absolutely.

Do I think all financial planners/insurance advisors should know of this purchase program so they can provide the “best” advice to clients? Absolutely.

By Roccy M. DeFrancesco, JD,CWPP, CAPP, MMB
TrustMakers.com

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