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Steven Jarvis, CPA (00:51)
Hello everyone, and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professionals Edition. I’m your host Steven Jarvis, CPA, and welcoming back to the show we have Brian Smith from FIA. Back to talk this through, some really tangible examples of how we can help our clients when it comes to the topic of annuities and life insurance. So Brian, welcome back to the show.

Brian Smith (01:13)
Thank you, Steven. It’s always great to be here. I love joining you.

Steven Jarvis, CPA (01:16)
Yeah, I love these conversations, especially when we can get super tactical and you’ve been on the podcast before. We’ve talked a little bit more high-level about things that advisors really should be keeping in mind. The last time you were on, we were talking a little bit more about just how many annuities are already out there. The percent of advisors who are going to have clients who have these products, whether the advisor themselves is recommending them or not. And this isn’t meant to be a podcast vetting the pros and cons of annuities at large. The reality is…There are already a lot of these products out there. And as advisors who want to be responsible stewards for our clients, we understand how to clients navigate these things.

Brian Smith (01:54)
Yeah, and there’s so many different kinds and different scenarios for every client that to know that you don’t have to know it all, you just need to know where to go. We’d love to help you circumnavigate some of these things to find the very best fit for the client.

Steven Jarvis, CPA (02:09)
Yeah, absolutely. makes one of reasons I enjoy our conversations that it is it makes me think a lot of what we do here at Retirement Tax Services, which is I want to be expert in taxes. So I’m not trying to take over an advisor’s entire relationship when they have a specific need where there’s tax planning to be done or tax preparation to be done. We get to step in and really fill that. And as I talk to more and more advisors who work with you, I you’re doing the same thing on the annuity side. You’re not trying to replace everything the advisor is doing. You’re saying, hey, when you need this specific type of help, here we are to lend a hand.

Brian Smith (02:38)
Exactly. Just recently, just last week, I was talking with an advisor with a fairly sizable book of existing annuities. And he said, well, we just don’t replace. And I said, why would that be? And he said, just because we’re replacing for bad in the industry. And I said, yeah, mean, for advisors or maybe more specifically, insurance agents that are just looking for another sale. But If we can provide your client a better scenario because interest rates are higher, whether that’s more opportunity for growth or higher guaranteed income, wouldn’t you want to do that? Yeah, absolutely. And it’s not the old world where duties were paying 12 % commission. Those days are long gone, thankfully. And when you can pull a 1 % trail, which is probably similar to what you’re doing for AUM, if we can make the clients better, let’s do it.

Steven Jarvis, CPA (03:28)
I’m glad you bring that up, Brian, because we talked about it when you were on before, but whether it’s tax planning, whether it’s annuities, any other area of financial planning, the best work is done when we tie this back to client goals. So, mean, you kind of maybe indirectly were commenting on this, that this isn’t about like some kind of churn. It’s not how do we identify every possible replacement we can do. It’s, okay, how do we know when there’s an opportunity that it’s worth looking into? And I know as we were getting ready for this podcast, you had had a specific situation that had come up that we wanted to go through together because it really kind of gets into the weeds of what this can look like in practice to give people tangible examples. So why don’t you kind of start high level of this situation you were describing to me that really, it turned out to be a great opportunity to help a client better accomplish their goals.

Brian Smith (04:11)
Absolutely, absolutely. So here at FIA, we were working with an advisor that gave us a case. A client had been in a variable annuity since 2005. So they had put in about $182,000 back in 2005. And at that time, it was appropriate. It was a good sale because the client thought that they were going to need guaranteed income to supplement their other income sources at some point. you know, fast forward to 2023, where $182,000 has now turned into $346,000 inside of this non-qualified annuity, and the client’s goals have changed. They received a very large inheritance along the way, and they no longer needed that income feature that the variable annuity was purchased for. So now here we’ve got $164,000 of gain in a non-qualified annuity. we’re not, you know, the client isn’t exactly sure what to do. The advisor isn’t exactly sure what to do. The one thing we know we can’t do is surrender the contract because nobody wants $164,000 of ordinary income tax if you were to say move that to AUM or something. That’s kind of where it started.

Steven Jarvis, CPA (05:29)
Well, Brian, let me pause you right there for a second, because I think that is really important to highlight. And you’re focused right on it. Hey, if we’re going to do, whether it’s with an existing annuity, we’re moving brokerage accounts, we’re rolling money over, we’re distributing money, when money moves, particularly between products or institutions, we’ve got to make sure we’re crystal clear on what that means for tax purposes. Because as often as I get pushback from advisors on, I don’t want to inadvertently give tax advice, where we actually see problems arise is when advisors don’t take that piece seriously and they don’t take the time to understand the implications of their money they’re moving and they create tax liabilities that they weren’t even planning on or anticipating. So again, whether we’re just helping clients navigate an existing product, an existing account, we’re trying to make some kind of change, like bare minimum, we’ve got to understand what the implications are. Now, then we can level up from there and say, okay, not only are we gonna understand the implications, but then we’re going to help them adjust to their current goals because that’s just part of life that goals change over time. So, okay, so we’ve got this client who’s got enormous built-in gains who what they’re currently in isn’t really serving their needs anymore because their life has changed. And so this is a really good example of where FIA can step in and help identify, okay, what are potential alternatives? So what was next steps for this client?

Brian Smith (06:45)
Great question. Thank you. So the first thing we thought we needed to do is kind of sort of dig into the guts of the existing policy. So looking at the growth over the last 18 years, it had averaged about 4%. Mostly because of the fees that are embedded in the variable annuity. So you’ve got mortality and expense, you’ve got sub-account fees, and you’ve got an income rider fee. And that was right around 3% a year in fees. So over 18 years, clients averaged about 4%. And I’m not making a comment of whether that’s good or bad, it just was. So, but at the same time, we wanna take a look at how investments would have performed over that same period of time. We tend to just look at the S &P 500. And over that same time, it had averaged about 7%. So without all those fees, $182,000 could have grown to 550 as opposed to the 346 that it grew to. So that’s a pretty significant drag. The fees created on the overall growth of that particular product. But so now we’re looking at that. We’re trying to figure out what the client really needs now. They were clear that they didn’t want the fees and they didn’t need the income. So one of the things that I see that drives me absolutely crazy is people paying income rider fees for a feature they’re not going to use. And then they compound it because they take RMDs on qualified accounts while they’re paying for a feature they’re going to raid by taking the RMDs. Happens all the time. Drives me crazy, but that’s just a personal pet peeve. In this case, we didn’t need the income. We didn’t want to pay the fees. So what we looked at is moving that product to a fee-based index to annuity. And we don’t normally talk about company and product on the podcast. And that’s because we’re talking in generalities. We’re not really getting in specifics. In this case, we opened up, we helped the advisor get into, or get the client into a Mass Mutual Assent, fee-based index protector seven. That’s what it’s called.

(08:55)
And the thing that I like about this is it’s got a, S&P 500 cap at 10 % and it’s locked for the length of the surrender charge period. And if anyone has sold VAs or FIAs in the past, one of the things, or RYLA, one of the things that drives you crazy is that the cap starts at 10 and then it goes to nine and then it goes to seven and then it goes to four and you’re still locked up under a surrender charge. For this particular product, it’s locked. 10% is locked for seven years, it cannot and will not go down. And you can charge up to a 1 % fee. Most of our experience shows that advisors sort of apply a fixed income type fee, typically 50 basis points, but you can charge up to 1 % and it comes out of the actual account. You don’t have to bill it from a separate account.

Steven Jarvis, CPA (09:40)
Brian, the topic of fees gets a lot of attention in our industry. So from your perspective, talk about what the significance of this being a fee based product is.

Brian Smith (09:47)
Well, I think there’s two parts of it. Number one, for some advisors, there’s a general aversion to commissions. We understand that. And for us, it’s really about what is the best opportunity for the client. In this particular scenario, MassMutual Send has the commissionable product and they have a fee-based product. And right now, the fee-based product is significantly better than the commissionable product. But we’re also sensitive to the fact that there are people that just don’t want to take commissions or don’t want to acknowledge commissions. So if it makes it easier to represent to the client and fits your model better, particularly if you can charge the fee out of the individual product that you’re selling, and that didn’t always exist. Five years ago, you had to bill it from another product or from AUM, which creates various problems that you have to solve. And if fee-based feels better for you and your clients, then great. And in this case, it’s a better product as well.

Commercial (10:44)
belay.com

Steven Jarvis, CPA (11:50)
I love the flexibility that creates of having the options because a lot of times what gets lost in the kind of chest pounding around which fee type is better is that at end of the day, it really should just be about how we serve the clients best. And so I love it when there’s flexibility to be able to explore that and make sure that we’re really doing what’s gonna accomplish the client’s goals.

Brian Smith (12:09)
And now there’s even fee-based guaranteed fixed annuities. So the RIA world has certainly made an impact on the insurance world, which is a great thing. And there’s options both ways, commissionables or fee-based, whatever, again, whatever fits the client’s needs and your individual practice. And we’re happy to help you with both.

Steven Jarvis, CPA (12:30)
Yeah, and I’m a huge fan of some say quite often, I mean, you know, kind of pictures or it didn’t happen. Like, let’s get the real documents. Brian, you mentioned actually, like when you go through this process, you’ve got to you as the advisor or someone on your team, someone uses a resource like FIA, somebody’s got to dig into the details and make sure they understand what’s really going on in a particular policy, because they’re not all created the same. So to that end I asked Brian and he was generous enough to share the details behind this case. And so if you go to retirementtaxservices.com /FIA, we’ve got some of the documents behind this so you can see exactly what went on in this situation. Because it’s fun for us to get here on a podcast and talk about this. I know there’s gonna be people who wanna look at the details, review kind of under the hood. So again, go to retirementtaxservices.com/FIA. You can download those documents. You can also get in contact with Brian and his team, so that you can do a case review with them as well. But Brian, let’s keep going down this particular client example because, you talked about understanding the existing policy, about identifying something that’s better aligned with their goals, but we still have this issue of the built-in gains, of what do we do with this 160 plus thousand, if I remember the number right, of potential tax issues.

Brian Smith (13:37)
Exactly, thank you. So our recommendation to the advisor was simply to 1035 exchange that existing annuity into that mass mutual product. We eliminated the fees, we took away market risk, there’s no downside risk. And because we used a 1035 exchange, a non-qualified annuity to another non-qualified annuity, we preserve the cost base and the gains. In fact, the seating carrier, in this case, it was Bright House, is required by law to send a cost basis letter so that the new carrier can see the difference between what was originally invested and what it’s grown to and keep those separate. And one of their options, Steven, would have been for them to just turn on the income rider at Bright House. That’s not a terrible idea. However, now, if you’re at the end of the year and you’re trying to do tax planning, you’re sort of having to work around that withdrawal that’s being generated from the insurance company. In this case, this allows them to grow the asset income tax deferred. And then at the end of the year, decide how much do you wanna take because it’s got a 10 % free withdrawal. So we avoided that $164,000 tax bomb by doing a 1035 exchange and then giving the advisor more flexibility in terms of how much to take and when to take it. So in this case, kind of hit the triple or the home run of avoiding a tax bomb, eliminating fees, eliminating downside market risk and probably giving better upside potential for the client and better planning tools for the advisor.

Steven Jarvis, CPA (15:14)
Brian, I love how you describe that situation because I’m always very hesitant when people want to offer the same solution to every situation or when they say, is my solution, now let’s force feed it into the client situation. And so anytime that we can go through these steps that you’re describing to say, okay, what is the client’s current situation and what are their goals? Does their current situation align with their goals? What kind of things do need to watch out for if we’re gonna make a pivot here? And it’s so important to understand what these details are because and jeez I’ve talked to insurance providers like E&O insurance providers who are making payouts on claims against advisors where the tax related situations that they usually describe are things when something like you’re describing goes wrong is what really what it is. An advisor comes across an investment, an account, an annuity, whatever it is, and doesn’t understand the tax implications. So rather than understand that, I can do a 1035 exchange, I can preserve this basis, they cash out one product and put it into the next one, now we’ve lit that bomb. Now we’ve created a huge tax liability that the client’s not going to be happy about. And yes, we’re still deferring those taxes, but to your point, Brian, we’re creating flexibility. Now instead of… taking a huge tax hit on money we don’t need access to right now today, we’ve given ourselves some time to be strategic about getting to the end of the year and saying, okay, was this a high income year, a low income year? Do I want to take a large distribution? Do I take no distribution? And so we’ve created flexibility for ourselves, again, to ultimately help the clients accomplish the goals that are most important to them.

Brian Smith (16:37)
Which is exactly what we want to do. Happy clients make happy advisors. And both of those make me happy.

Steven Jarvis, CPA (16:44)
Absolutely. So Brian, in this case, you know, we had a client who had this specific product that, you know, needed a review and kind of an understanding to then be able to make a recommendation on what happens next. What other things should advisors be on the lookout for as they’re working with clients or bringing on new clients to say, hey, maybe, maybe I need to attack someone in like Brian and his team to review, to review a policy to help understand what options might be available.

Brian Smith (17:08)
That’s a great question. In fact, I just took a call from someone that works with RTS down in Texas, and they gave me an existing registered index linked annuity, and it had done extraordinarily well. It was low fee, it didn’t have any income features, but it did have some built up gains. And I said, know, honestly, for what the client is looking to achieve, I really don’t see the need for a change. Sometimes we always sort of assume that the advisor before us was doing wrong, sort of the needs of the business. But in this case, you sometimes you just need to look at it and find out what are the underlying fees? What does the performance look like? Is there an income rider? Is there an income feature? Is there a death benefit rider feature? Are those things still accomplishing what the client’s goals are? And if they are..Sometimes the best answer is this is a good product for your needs. If not, what are our other options? What can we think about in terms of a reposition, know, trustee to trustee if it’s IRA money, a 1035 exchange if it’s non-qualified to better fit the client’s needs, maybe to lower fees, maybe to increase benefit or, you know, and this happens all the time. Clients. Goals completely change. Like the case that we were just talking about, Steve and the client thought they were gonna need income and then they didn’t. Sometimes they don’t need the money at all. Sometimes they just want a lump sum death benefit, some kind of enhancement to leave to their kids or to their estate. That’s great. So I think it all comes down to once again, what are the client’s needs, wants and goals? And if we can satisfy that with the existing product and it meets the needs, great. That’s a fantastic thing, less work. If not, let’s take a look and see what has changed and how we can fulfill what those needs are.

Steven Jarvis, CPA (18:57)
Brian, there’s lots of great perspective in there. One of the things that stood out to me though, and I appreciate that you said this, I don’t think it gets mentioned often enough, just because you’re the client’s new advisor doesn’t mean the last person was the root of all evil. It doesn’t mean that they were trying to scam the client or a terrible person. That’s fantastic that they’re working with you and you’re a better fit for their needs, but let’s not just start with the assumption that everything before was garbage and we need to burn it all down and start over. Like again, we want to…we gotta understand what their actual situation is, what their goals are, how we make the best outcome possible. I think that’s a very good reminder we should throw out probably a little more often.

Brian Smith (19:32)
And I had one where just last week where it wasn’t in the existing product wasn’t in the client’s best interest. It had been at one point, not too dissimilar from the case that we were originally talking about, but it was a large non-qualified annuity, had a ton of built up gains. And when the advisor said, hey, what are you really concerned about? What do really need? I’m really worried about long-term care. So they brought that to us and we found out that we could 1035 exchange that over to a linked benefit program where they would get three times leverage. And if it came out for qualified long-term care, it was all income tax-free. So the client got to preserve, once again, preserve their cost basis and gain and take care of their biggest concern in this case, which was long-term care. To me, case design is like putting together a puzzle. I never get bored because it’s always different and if you can solve the client’s needs, it’s kind of like solving a puzzle. It probably makes me a nerd, but I’m okay with that. I’m okay with being a nudie puzzle solving nerd.

Steven Jarvis, CPA (20:35)
You’re in good company. Tax Nerd is a title I’ll gladly wear. Brian, I really appreciate you walking through that specific example, and hopefully it illustrates for advisors listening that there’s opportunities here to understand our clients and to help them accomplish the goals that most important to them. And anytime we can bring it back to that, I’m all for it. Because it’s the same with tax planning. It’s really easy, especially if you’re spending time on TikTok or Instagram, it’s really easy to get distracted by shiny objects of, well, it’s I’m only doing good work if I accomplish this magical thing that I saw someone describe on social media. And that’s just, that’s not real life. Real life is taking the time to understand client situations, to understand our options, and then to deliver on that. And sometimes as advisors, that’s something you can do in house yourself. Sometimes it’s time to reach out and get that help to say, I’ve got a situation where bringing in another resource is really where we’re gonna go next level with this. And so when you go out to retirementtaxservices.com /FIA to download the resources that we were talking about today as far as this case. You can also request a case review with Brian and his team so that you can get some help and understand really what your options are to better serve your clients. So, Brian, anything else that comes to mind as we have this conversation to wrap up for our listeners here?

Brian Smith (21:45)
I don’t think so, other than the fact that we did some of the math on the existing product relative to the S&P, that’ll be out there for you. There’s a redacted statement, so you can take a look at that. And also just a little bit more information on that mass-mutual product that we recommended, all will be there for you if you go to, say it again, Steven RTS.

Steven Jarvis, CPA (22:08)
retirementtaxservices.com/ FIA. Yeah. Well, Brian really appreciate it. Great information as always. And of course, looking forward to seeing you at the summit in a few weeks. I think by the time this airs, the summit 2025 will be sold out. You can go out to retirementtaxservices.com and double check, but we’re super excited to have FIA there as a partner again this year. It’s gonna be a great event. We’re gonna do a lot of great things for advisors. So.Brian, thanks so much for being here. really appreciate your time and all the great work you’re doing. One last time, that’s retirementtaxservices.com/FIA. For everyone listening, thanks for being here and until next time, good luck out there and remember to tip your server, not the IRS