On July 28th, New Jersey Law Journal published a special supplement on “Wealth Management.” The featured section includes a co-authored guest article from McManus & Associates Founding Principal John O. McManus and Mark Cortazzo, senior partner at MACRO Consulting Group. The piece, titled “How Estate Planning Can Unintentionally Wreck a Retirement Plan,” outlines steps that can be taken to protect clients when complex investment vehicles like variable annuities are involved in the estate planning process.
Introducing the topic, McManus and Cortazzo emphasize the importance of being fully informed as a professional who can be held accountable for any missteps and blamed for poor recommendations:
Unintended consequences—it’s a phrase that sends chills down the spines of every professional who can be held liable for innocent mistakes. With millions of dollars at stake, decisions by estate planners must be well-informed and exhaustively considered. When variable annuities are involved in a client’s estate plan, what you don’t know can hurt you and your clients.
Flagging a potential pitfall for advisors, the piece underscores that “changes made to existing annuities during the estate-planning process can blow a hole in clients’ retirement plans.” In fact, not understanding the client’s living benefits could mean that a surviving spouse is disastrously disinherited from lifetime income guarantees. “Picture this,” says the op-ed:
A couple has a variable annuity with a $1 million income guarantee, but an account value of only $100,000. The rider on this contract entitles the surviving spouse to $60,000 per year for the rest of his/her life, guaranteed for at least 10 years. If the primary beneficiary is not the spouse, it could negate the guarantee, resulting in a payout of the account value ($100,000) upon the death of the first spouse and loss of income payments for the surviving spouse. Now, compare the tax savings on $100,000 achieved by an estate planning attorney with the value of the lost payments (at the 10-year minimum, the $60,000 per year lifetime income payment totals $600,000). The financial impact could far outweigh a potential estate tax savings. Additionally, in an attempt to minimize estate taxes, improper planning with variable annuities can trigger significant income taxes. This may occur, for instance, if a bypass trust is named as the beneficiary on a nonqualified annuity, versus an individual being able to stretch payments over his life expectancy.
McManus and Cortazzo go on to highlight a significant safeguard that can be put in place to protect both advisors and clients: collaborating with the other professionals who clients have trusted with their wealth. From the article:
If you are an estate planner, you were specifically hired because you specialize in wealth management. But rather than depending on yourself as an excellent generalist without exception, it may be better to be safe than sorry and hire an expert when complex products such as variable annuities are involved. Moreover, while your clients count on you and their other financial advisors to lead them in the right direction, it is important to encourage them to take an active role in their own retirement planning so their wishes are fully reflected, they understand the benefits tied to their choices and you have the full story on which to base your recommendations.
For more important tips related to handling variable annuities, read McManus and Cortazzo’s full expert article in the latest issue of New Jersey Law Journal or find it here posted on the publication’s website. For help reviewing how all the pieces of the puzzle best fit together in your estate plan, give McManus & Associates a call at 908-898-0100.
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