Did somebody actually run an illustration?

Go to an independent agent. Companies such as Sun Life deal better with
wealthy but unhealthy. Other companies won't bother.

"dave18353" <davemorgan[at]comcast.net> wrote in message
news:1116883016.095293.244910[at]g47g2000cwa.googlegroups.com...
- quote -

I have been told that becasue of her age and health history (long-time
smoker, 2 bouts with cancer), a life insurance policy would be
prohibitively expensive.

The disclaimer trust holds a part of her inheritance from my Dad that
she "disclaimed" so that if she should die before the Federal estate
tax limits exceeded her ttal estate value, the disclaimer would pass to
her heirs tax-free. She has use of the income from the fund, but can
only use the principal if needed for health and well being. The other
trust s simply the balance of their esttate (outside off IRAs) that she
inherited and is the trustee for.

Your assumptions seem fine. By the way, Vanguard reduced their Admiral
shares $100,000 minimum, so the Total stock fees (and SP index) are
down to 0.19%. You also get a dividend yield of approximately 1.70% as
of April 30.

Her advsior suggested that the defferred annuities were a good way to
shelter her from taxes. After reading your post and others, I have
been trying to evaluate this idea more carefully. More than likely, she
will never need this money unless she gets into a long-term care
situation. The chance are good that the annuities would pass to the
estate and apparently my brother and I would pay income tax on the
gains in value of the annuities. According to Andy's post, if the
invsetment were mutual funds or stocks, the basis would be stepped up
and we would owe no tax (other than possibly estate tax) on the gains.
Right so far? Score one against the annutity. The other scenario is
that she would need some or all of the money. In that case wouldn't she
just pay the capital gains rate of 20% on the mutual funds, instead of
the income tax rate (25%) she would pay on the gains in the annuity? If
so, score another one against the annuity. I have also looked at the
fees and expenses for the variable annuity: assuming she invested in
Fidelity's VIP 500 (an S&P index) the variable annuity fee (0.8%),
management (0.24%), and expenses (0.10-0.35%) could total from 1.14 to
1.39%. Vanguard's SP index charges 0.37% I believe, which means she
would lose at least $35,000 for on a $300k investment held for 10 yrs
(assuming 6% yield). Score another on against the variable annuity.

Please tell me if any of my assumptions are wrong or I am missing
something. I have a lot to learn and fast. In spite of my best efforts,
she will not hire an independent planner to check the advicve she gets
from Fidelity. BTW, here advisor says they they get no commisions, but
Fidelity gets a flat fee for selling products by other companies. He
did tell that if he worked for commisions, the commisioion on these
annuites would be $65,000! That tells me that these things are very
profitable for the insurance companies.

The first year rate on the fixed annuity is a teaser--it drops to 4.1%
after the first year with a 3% minimum. It doesn't have the fees, but
still seems to have a larger tax burden in the long run--especially if
the gains pass to here estate.

Thanks for your response--it took me a while to work through the
information and get this reply together.

Elle wrote:

- quote -

Bit of a nitpick: if this were complete information, then these bonds
would not be investment grade. NASD Regulation 6210(h) requires a
majority of nationally recognized statistical rating organizations
(NRSROs) to rate a security investment grade for it to be considered
such. (Until nine months ago, a split rating would have deemed a
security non-investment grade, regardless of how many NRSROs thought
otherwise.)
http://www.nasd.com/web/groups/rules...sdw_009907.pdf

However, because Fitch and Dominion still rate these bonds investment
grade, they are, legally, still investment grade. The reality though is
that the bonds are, and have been for some time, priced as junk.

- quote -

Fitch -
GM:
http://www.fitchratings.com/corporat...sr_id=80089000

FoMoCo:
http://www.fitchratings.com/corporat...sr_id=80088995

Dominion -
GM: http://www.dbrs.com/web/sentry?COMP=...uerID=10003161
FoMoCo: http://www.dbrs.com/web/sentry?COMP=...uerID=10003151

For completeness, note that A.M. Best was just added as the fifth NRSRO,
but its only rates insurance companies.
http://www.washingtonpost.com/wp-dyn...-2005Mar3.html

--
Mark Freeland
nBeOwXs[at]pacbell.net

<james92c[at]gmail.com> wrote

- quote -

Bit of a nitpick: It's true that Standard & Poor's rating of Ford and GM
bonds is at the highest ratings of junk it has, at BB and BB+. But Moody's
still classifies these bonds as investment grade (barely), with ratings of
BAA2 and BAA3.

My source is www.fidelity.com, under fixed income, search secondary market
bonds. No Fidelity account is necessary to do this search.

If the woman has only maybe 5% of her $800,000 of individual corporate bonds
rated thusly, and the rest are investment grade, I wouldn't be too
concerned. If she's buying new bonds to replace those that mature, I would
urge her to consider (or tell her broker to consider) CDs, too.

- quote -

You're saying that over half the assets are in corporate bonds. Is this
a corporate bond FUND, or actual bond certificates? If it's in a bond
fund then the value is guaranteed to decrease over the coming years, as
interest rates are going higher. If they are actual bonds held then no
worries, it's the coupons you collect and that stays the same as long
as the company stays solvent.

Finally, unless you know what specific companies are held you should
not be so sure that they are 'good quality' corporate bonds. Up until a
couple months ago, most people (who didn't do their research) thought
that Ford and GM bonds were good quality, "investment grade". Now they
are junk bonds, huge decrease in value.

Nothing can replace your own research. Know what you hold.

- quote -

I can think of no reason why a 74-year women with $1.5 million in
assets needs a variable annuity. What are the benefits to her or you? I
can think of none. The so-called "death benefit," for which you'll be
paying $2,400 a year (.80% times $300K), guarantees only that her
estate will receive no less than $300,000 in the event of her death.
The only way this might have value, is if the markets tanked and she
died all in the next year or two. Otherwise, the value of her
account--assuming it's well diversified--will almost certainly rise
above $300,000.

And the $2,400 per year in fees for the "death benefit" is in addition
to whatever fees she'll pay for the funds within the variable annuity.
Fidelity probably has a good, low-cost product, in there, but why does
she need it when you could just invest the money in the same low cost
funds outside of the annuity?

The fixed annuity also sounds like a patently bad idea. The first year
rate of 5.1% is likely a teaser rate (do they tell you how they will
calculate the rate in the second year and beyond?). Also, could you
withdraw the money after then first year actually realize the 5.1%, or
would surrender charges destroy the return? Expect 3% in the second
year and after. Bottom line: she could likely earn the same or more in
high quality corporate bonds and treasury securities that would not
lock up her money in the annuity product, which features surrender
charges and other restrictions.

I wonder how her advisor is compensated.

Can anyone see how this recommendation regarding the annuities makes
sense?

In that case, her $500,000 IRA should support her inflation-adjusted
income needs for your guess at her life expectancy, assuming only 4%
interest. Drawing that down will minimize income taxes that will be due
on her IRA. I suggest she use something like a TIPS mutual fund (such
as FINPX or VIPSX) in her IRA. Her trust accounts could be invested in
a moderate growth portfolio (say 60% equities and 40% bonds) to provide
protection in case she needs expensive long-term care that depletes her
IRA faster and to leave an inheritance. If the trust accounts have
already been subjected to inheritance taxes (whether any were due or
not), they should pass to the beneficiaries (presumably you and your
brother) with a stepped-up basis and no further inheritance tax
liability. Check with your tax advisor or estate planning attorney to
verify this.

Dave

She has just battled through a second round of breast cancer, but is
back stronger than ever (we are playing golf Saturday). She smoked for
40 years, but I expect her to live at least another 10-15 years. Her
first priority is to have the income she needs, plus enough to provide
for long-term care if that is needed. I think its is her goal to
maximize what is left to my brother and I, but that is way down the
list of priorities.

dave18353 wrote:
- quote -

You need to watch out for those variable annuities; if your mother dies
while there is still money in the variable annuity all the increase in
value over what she originally invested will be taxed as ordinary
income to her heirs, as compared to just owning stocks outright in
which case her heirs get stepped up basis. My dad had all his money in
variable annuities, and he had all the variable annuities in stock
funds. Now I am paying taxes on the capital gains at ordinary income
rates; if he had just put the same money in a plain old mutual fund I
would have inherited everything with a stepped-up basis and owed no
income tax on the gain.

Andy

Whether it is a good plan or not depends on what she is trying to
accomplish. Is she in good health, wanting these investments to provide
her income for a life expectancy of 20 or 25 years? Or does she want to
maximize what is left to her heirs?

Dave

An alternative, take the proceeds, buy a life insurance policy and have
insurance benefit come to the beneficiaries tax free.

"dave18353" <davemorgan[at]comcast.net> wrote in message
news:1115828805.746952.282810[at]g14g2000cwa.googlegroups.com...
- quote -

for thise of us which read her to learn, could you explain what the
trusts accounts (disclaimer trust and trust accounts referred above)
are?

thank you in advance...

dave18353 wrote:
- quote -

She can make gifts up to a specific amount to each of her heirs now
without having to pay taxes.

--
Ron

My Mom's advisor at Fidelity has suggested a financial plan that I
would appreciate some second opinions on.

She is 74 and widowed and has about $1.5M in assets excluding her home.
Currently she has about $500k in her IRA, $275k in a disclaimer Trust,
and the remainder ($725k) in a trust account. About $800k is in good
quality corporate bonds that produce the income she needs. She is
taking the minimum IRA distribution of about $20k per year. The rest of
here assets are in a balanced fund (Oakmark) and Vangaurd's total
market index fund.

Her Fidelity advisor has suggested the following changes to reduce her
current tax burden and that of her heirs:

--Reduce annual income to $36k and take it all from the bonds in the
IRA. (She has not been spending the $48k/yr she has been taking).

--Invest the $725k trust fund in annuities as follows:
$300k in a variable with death benefit (0.8% charge)
$425k in a 7-yr fixed, 5.1% 1st year, 3% min.

The variable annuity is a Fidelity product, the fixed is a Principal
Group. There are no sales charges or commisions with these we are told.

Doe this seem like a reasonable plan? Are there other options we should
consider?