Protecting The Innocent Hot

SherylCPASherylCPA  
 
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I've written about the "evils of annuities" before. What is amazing to me is that annuity-pushers are still ripping people off and getting away with it!

Here's a case in point. A friend of mine emailed me that her parents were talked into buying an annuity. They were invited to a "free" steak dinner by a "financial planner" to listen to an "educational" presentation. (The quotation marks are intentional. The sentence should read: They were enticed into a sales pitch with a steak dinner by a shyster.) After hearing the presentation, the signed up for an annuity in the amount of $40,000.
 
Now, $40,000 might not seem like a lot for those of us advising clients with portfolios of several million dollars. For my friend's parents, $40,000 was a huge chunk of their savings. The scumbag who sold them this annuity made a commission many times over the cost of their dinners. And who knows how many others fell prey to this scheme?
 
Let's look at the problem. My friend's parents did not have much in liquid savings. Sure, they have some IRAs, but non-retirement cash was minimal. Now, the vast majority of it is tied up in an annuity.  If they want to take money out, it will cost them seven percent of what they put in! The penalty will decline to zero after seven years. In other words, my friend's parents will lose money if they want or need to access their funds prior to seven years from now. At ages 75 and 78, this seems almost criminal. 
 
What if they manage to let the annuity grow without taking money out? Should they utilize the funds down the road, any growth would be subject to tax at ordinary rates. Growth from investments held personally would be taxed at lower capital gain rates. If the annuity passes to their heirs, the ordinary tax on the growth will be payable by them. If my friend's parents had let their funds grow in a taxable account, any amounts passed on to their heirs would avoid tax altogether (because of the basis step-up).
 
As RIAs, we can't protect everyone. But we can educate our clients, friends and employees in the hope that they will share this warning with their circles. 

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