Abusive Tax Shelters: Benistar Problems

Abusive Tax Shelters: Benistar Problems: In a recent U.S. Tax Court case, taxpayers suffered a double loss. The taxpayers, consisting of four couples, had purchased welfare benefi...

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Lance WallachThe Truth About Variable Annuities

Have you ever wondered why so many of your clients own variable annuities? Upon review if these variable annuities, do you frequently see the word “guarantee”? Guarantee, what does that mean these days? Let’s explore the answer to these questions as we gain an understanding of variable annuities.

The typical VA acts as a tax deferred tax shelter, like a Traditional IRA or 401(k). Unlike a Traditional IRA or 401(k), a client can open any sized (e.g.: $1,000 or $1 million) VA, independent of their income, age or employment status. This is quite attractive for clients looking to shelter income from taxation, particularly for those that cannot achieve their goal with a Traditional IRA or 401(k).

As a reminder, Traditional IRAs can only be established by those under the age of 70 ½ and those (or the spouse of those, if married filing jointly) who receive income or alimony. With a 401(k), your client must be employed to be eligible to make contributions. Each vehicle has contributions limits, which limit the tax sheltering benefits.

In almost all cases a variable annuity (VA) is a form of life insurance. The typical financial planner (translation: insurance salesperson), markets the variable annuity as a way to safely invest in the financial markets, without risking your client’s principal. We all know there is no such thing as a free lunch inside or outside the world of finance.

The insurance salesperson will often tell your client you cannot earn less than 6% or 7% on the investment. This only part of the story - and, as you have probably already imagined – only the good part.

Inherent in most VA policies are two components, an investment component and an insurance component. The investment component offers a choice of investments simil

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