Mortality-limited fixed to floating rate swap Description — In order to finance annuity-life insurance transactions, it would be superior to have a fixed-to-floating rate swap as lenders dislike fixed-rate loans for indefinite periods. Annuity arbitrage transaction organizers, life carriers and life re-insurers were unable to quantify for themselves the sources of vig beyond mortality expectation.
As a result both life carriers and life re-insurers were concerned that the gain was at their expense. RCP was able to quantify further sources of value and demonstrate that the transaction was not a zero sum situation. RCP identified for investor consideration the key regulatory, accounting, tax, legal and industry related risks. RCP created risk transfer products that mitigate key risks enabling safer returns. Additionally, RCP developed a pricing model to help establish the value of policies to be purchased.
Finally, RCP identified new sources of value in the life settlement space - developing an investment vehicle that generates significant returns while betting against the typical investment strategy deployed by most life settlement speculators. RCP identified a comprehensive list of risks and their respective impact on potential returns. The analysis included the tax implications surrounding traditional life settlement strategies, securitization techniques and structures that benefit charities.
RCP aggregated the opportunities from a risk reward perspective and made recommendations that were ultimately followed. RCP further looked at different optional riders to the policies and how each of these would affect the risk-reward trade-off. From this research, RCP was able to determine a rubric for forecasting discretionary life carrier behaviors. Unusual life risks can be mitigated and cost-effectively transferred.
Contact RCP to discuss how we can help facilitate the successful completion of your life insurance based transaction. Our team of experts specializes in structuring innovative risk transfer instruments that address unusual life related risks. Back Our Team Insurance Partners. Their goal is to grow the asset value and cash flows while positioning the holdings to benefit future generations of family or favorite charities.
They have taken the appropriate steps in choosing the entities and manner of taking title that provide full advantage of the offered tax incentives. A favorite qualifying charity ultimately would benefit from a charitable remainder unitrust or charitable annuity trust, while the donor enjoys cash flows for life. With the above differences in mind, commercial real estate advisers can benefit greatly from keeping their clients abreast of market trends and estate planning tools.
The following is a general look at the kinds of exit strategies that investors in all three of these categories may want to consider. Tax-friendly entities. First and foremost, advise your clients to work with both tax law and accounting professionals to determine their best options for holding title to their property.
Some options include family trusts, S-corporations, C-corporations, limited liability companies, limited partnerships, real estate investment trusts, specialized trusts, and family foundations. Choosing the right form of holding title delivers protection of equity, tax savings, and flexibility in planning future benefits.
Tax-deferred exchanges. These tools are the most popular form of putting off the tax man for a future day. While most Internal Revenue Code Section exchanges are designed to defer all the gain, the exchange also is useful in planning a graceful exit from ownership. A partial exchange results in tax savings for the qualifying portion. The exchange of a large property for several smaller properties allows the investor to spread his tax liability over several tax years.
Some things to watch for: Advise clients to take title to the replacement property in the same way they held title on the relinquished property the time to try out the new entities is before or after the exchange.
If the relinquished property closed in the last tax year, investors should not file a return. Instead they should file an extension until closing on the replacement property. Installment sales. Under Internal Revenue Code Section , when the disposition of a property in which at least one payment is to be received after the close of the taxable year in which the sale occurs, the seller will recognize gain or profit as he actually receives the proceeds over time.
Typically, the cash down payment would be taxable, net of closing costs, and the remaining installments would be taxed as they are received. This is an effective tax management program with the added benefit of providing interest income for the remaining balance of the contract. Due on sale and prepayment provisions need to be addressed in advance, as the full amount of the remaining tax of gain would be paid in the event the loan is paid off early.
All-inclusive trust deeds. This tool can be particularly beneficial with an installment sale in cases where the existing junior loan carries a lower interest rate than the negotiated rate on the all-inclusive trust deed. The seller then has the arbitrage on the collected rate on the full amount of the combined loans and the lower rate paid on the underlying loans.
Existing lenders can be an obstacle. Lease options. Under the lease option, the title to a property remains with the taxpayer and a contract to sell is contained in an option. The owner of the option leases the property with the lease payment equal to the amount of interest on an installment sale.
The lease deposit equals the down payment under an installment sale. The expected benefits to the buyer and seller are that the property taxes would not change; capital gain has not been triggered; the buyer has full use of the property, its management, and cash flow; the seller has lease income, assumes no management, and can plan ahead for the most beneficial year to exercise the option.
The Internal Revenue Service, lenders, and the county tax collector all are likely to challenge this device as a hidden sale, so professional counsel is a must. Exchange for NNN and sell cash flows. This strategy is to complete a exchange into a quality net-leased investment and borrow against the cash flows at a reasonable discount. The benefits are tax-free cash today.
Family limited partnerships. The formation of a family limited partnership provides a convenient way of passing along equity interests to family members at bargain prices. Control of the property remains with the grantor or general partner and the limited partnership interests are discounted up to 40 percent due to the lack of market liquidity. These can be used with lifetime gift exemptions and generation-skipping plans. Charitable remainder unitrust.
This structure is especially useful when property is fully depreciated. The transfer of ownership to a qualified charity results in no capital gains tax upon sale and cash flow for the life of the donors. The charity receives the remainder of the asset. Retained life estate. The donor receives a significant tax write-off in the year of transfer and use of the property for life.
Family foundation. This structure provides involvement in funding activities and specific needs, while providing tax benefits and control. Private annuity trust. Private annuities can provide significant benefit in transferring ownership of assets from one generation to the next.
Many rules apply to their application to investment real estate and they are fairly rigid structures that are not easily adaptable after implementation. Many similarities exist between private annuities and installment sales.
However, if carefully crafted, private annuities can avoid triggering a taxable event if the related-party obligor decides to sell the property. Reverse exchange. This is another planning tool that allows the replacement property to be acquired prior to closing on the relinquished property.
Recent tax rulings have blessed this strategy, but it is best to work with an experienced accommodator. In some circumstances related entities can be useful in completing a qualified exchange.
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This mismatch makes annuity arbitrage very useful for retirement planning purposes. It can provide lifetime income for an annuitant and his or her spouse. This would be the case if the couple bought an SPIA with a joint and survivor rider attached.
While the annuity would continue to pay the surviving spouse regardless of which one died first, that is not the case with the life insurance. Life insurance is generally written on the life of just one person, although joint life policies are available. Without a joint life policy, if the non-insured spouse passes away first, the purpose of the arbitrage is defeated.
Annuity arbitrage can be very useful for people with large, taxable estates. The strategy makes it possible to transfer wealth out of an estate without incurring any tax. The income from the annuity finances the premium payments, which are made from the ILIT. Any annuity income in excess of the insurance premiums can be kept by the annuitant or gifted to the trust. The transfers are tax-free because they are life insurance proceeds.
Investors contemplating annuity arbitrage should examine the composition of their current portfolio before engaging in this strategy. Funds used to purchase the annuity have to come from somewhere, so investors should understand how the strategy will affect their income and liquidity. Investors need to factor this in. An existing deferred annuity still in the accumulation stage would make an excellent candidate for these funds.
Investors in this situation might consider making a exchange into a new SPIA. This would also be the case if an existing insurance policy were to be transferred via a exchange in the annuity. Investors must also take their overall liquidity needs into account.
Funds used to purchase the annuity will be tied up virtually forever. Assets intended to finance specific high-priority consumption goals should not be used for this purpose unless the investor can replace them and still confidently accomplish those goals.
Investors in the highest income and estate tax brackets will enjoy the most benefit from annuity arbitrage. Investors should also calculate how annuity payments might affect their total income, especially if they are collecting Social Security benefits.
This is because a portion of the annuity payments will be taxable, which could make a portion of their Social Security income taxable. Fortunately, low interest rates translate into higher exclusion ratios — the proportion of an annuity payment not subject to income tax. Instead, consider annuity arbitrage as another tool to help investors optimize the totality of their financial resources.
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SMS is committed to excellent customer service. The company can help you find the right insurance agent for your unique financial objectives. Annuities View Subpages. What Is an Annuity? Annuities Explained. Indexed Annuity. Buying an Annuity. Reasons to Buy an Annuity. Current Rates. Immediate Annuity Calculator. Structured Settlements View Subpages. What Is a Structured Settlement?
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In order to buy life insurance, you have to go through an underwriting process that involves a physical, blood tests, and a thorough review of your medical records. This process can take a while, and patience is a virtue during the underwriting of your policy. Stan The Annuity Man , but I have a theory that you should buy as much death benefit possible with as little money as possible.
That pretty much defines term life insurance. I recommend locking in those premium rates for as long as possible, like to age 90 or longer. If there is no life insurance, then there is no annuity arbitrage, so one of the spouses being able to qualify for life insurance is essential. This strategy really works well because all of the benefits are contractually guaranteed.
Even though "annuity arbitrage" is usually fully customized, below is a common set up and the corresponding benefits:. There are many other annuity strategies that use leverage to maximize contractual benefits. However, the annuity arbitrage strategy just described is the most popular and most common. By Full Bio. Stan Haithcock is a national annuity expert who serves as a consumer advocate on annuities and spent 25 years as an investment advisor on Wall Street.
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