Commercial (00:56):

In the age of information, how do you know that you are giving your clients the right tax information, especially with a tax loss set to expire before we know it? Join us this year for the summit where financial advisors dive deep into the realm of tax knowledge and tax planning. Whether you are a tax aficionado or struggle to remember which schedule goes with what the summit is designed with you in mind in breakout sessions to meet you where you are at. Take control of your taxes today and reserve your spot at retirementtaxservices.com/summit to register to attend.

Steven (01:29):

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 on the show this week we’re going to address a question that I get fairly often that I don’t always have an expert answer to, which is why I’m very excited for my guest this week, who is Brian Smith from Foundational Income Associates. Brian, welcome to the show.

Brian (01:51):

Thank you, Steven. I’m happy to be here. Thanks for having me.

Steven (01:54):

Yeah, of course. I love bringing on people who have a deep expertise in a particular area and that area for today’s podcast is going to be all about annuities. And Brian, you and I have talked about this topic many times. This is a fun one for me from an online marketing standpoint because it feels super divisive if you’re in the wrong corner of the internet. But the reality is that gee, I mean you have a better number than me. There are millions of these things out there. There are great products like anything, there’s a whole spectrum of experiences that people have had and in my opinion, there’s too many people who are just dismissive of the topic of, oh, I don’t even want to engage in it, but this is just a reality and potentially a great opportunity for advisors, for clients. And even if you’re listening to this and you’re in the camp of, well, annuities are just for people who want commissions. Well great, your clients still already have them. If you want to be a responsible financial advisor, you need to have an approach for dealing with these and really, you need to take the time to understand them and know when they’re a great resource for advisors and their clients.

Brian (02:58):

Yeah, absolutely. I mean, just like you said, you can go on the internet and you can find 50 websites that say annuities are the worst thing ever. And you can find 50 other websites where annuities are all you should be selling. Just like any good financial planning process, you find the right tool for the right need and then it can be excellent. Sold in the wrong context, It can be the worst thing that’s ever happened. And I would say the insurance industry, particularly 15, 20 years ago was fast and loose on their marketing and so certain people did get burned, but if you’re doing your fiduciary duty, you have to look at when it’s appropriate and when it’s not. And that’s something I’m very happy to help anybody with,

Steven (03:39):

Which I really appreciate and that’s what you do. So why don’t you give the audience just a little bit of background on who you are and what you’re a part of and then we’ll dive into some more of the kind of actionable conversation around this.

Brian (03:50):

You bet. Okay. So like Steven said, Brian Smith, I work at Foundational Income Associates out of Plymouth, Minnesota. I work with a team of experts. We have well over a hundred years of experience doing just this, looking at annuities, finding the right fit, and we’re a part of what is called an IMO. Some people know what an IMO is and some people don’t. It stands for Independent Marketing organization. And what I love about working at an IMO is if you’re a financial planner, every wholesaler from every company is going to call you and they’re going to tell you why their product is the best and should be sold in every circumstance. We don’t have to worry about that. I’ve got contracts with 30 different carriers and 400 product. My job is very simple to help advisors understand their client’s need and then find the right product to fit that need. And I’m not beholden to any one given product or strategy or fluff that the insurance companies provide. It’s all about what is right for the client.

Steven (04:56):

Which I love that approach. And the reason that you’re here on the podcast, the reason that we’ve partnered with you for the summit this year is because you came highly recommended from advisors who have worked with you for years. This wasn’t, Hey, let’s just do a quick Google search and who can we talk to about annuities. I love talking to people who are experts in their field and who come recommended based on past experience. So Brian, before we get deeper into what you specifically do, let’s have a conversation around what every advisor should know and what they really need to do from an approach standpoint on the topic of annuities, regardless of who they work with. And as you and I were getting ready for this episode, one of the things that stood out to me is that I spend a lot of time telling advisors that basically show me the tax return or it didn’t happen kind of like pictures or it didn’t happen.

(05:43):

And so I have this huge emphasis on we’ve got to get to the real data. Every client files taxes. You’ve got to see the tax returns so that you can make informed decisions and know what to recommend next. And as we got talking, I realized, hey, this applies in other areas including with annuities. So whether that’s because this is a product you recommend to your clients or you’re just getting clients who already have these in their lives, we can’t just ignore ’em. We can’t just leave ’em on a shelf to get dusty. We have to get the real documents to understand what’s going on and then to evaluate whether there is a planning opportunity or recommendation we should make going forward.

Brian (06:17):

Yeah, absolutely. And most of the time, like you said, pictures or it doesn’t happen, the statements that the clients have give almost all the information that we need. And we talk to a lot of advisors who don’t want to do annuities, they don’t understand them, they don’t really want to dig in and that’s fine, that’s okay, it’s okay not to understand it. What we would like to do is you can securely upload the client’s statement, find out what does the client actually need? Do they need income? Do they need the safety that the annuity was there to provide? If not, then great. Now you know that sometimes old product can be very, very strong in terms of guaranteed income or growth, but oftentimes they were sold in a low interest rate environment and interest rates have changed. There’s a saying that we talk about at FIA all the time when interest rates are low, you refinance your house.

(07:13):

When interest rates are high, you refinance your annuities. So to look at, first of all, just to have the understanding to be able to explain the client, here are the fees, this is the rollover ratio and the mutual funds. If it’s a variable annuity, here’s what the writer charges are, here’s what it’s going to provide, allows a level of understanding for the client, okay, alright, now I know what I have. Does it meet the need? If so, great. Now you can check the block and say, I did my fiduciary duty and I know what my client has and the client understands it and they want that or maybe not. And if not, let’s talk about options.

Steven (07:51):

Well, Brian, as you’re describing that, again, I see a lot of comparisons to what I do in the tax world because I think every financial advisor has a responsibility to understand at some level certain aspects of their client’s financial lives. I think they have to understand at some level how taxes work because every money decision has a tax impact and then it’s up to the individual advisor of how much of an expert they want to become in taxes. And so you have some advisors who are very happy knowing a little bit and then partnering with somebody on the rest and you have other advisors other than the spectrum and they say, Hey, I want to be an tax expert myself. I’m going to become an enrolled agent. I’m going to become a CPA. But wherever you’re at on that spectrum, it still has to include the client getting taken care of. And the same is true as we look at annuities. Again, whether this is because clients already have them or you are just trying to do the responsible thing as an advisor and understand the options available. You’ve got to decide where you want to be on that spectrum of your own understanding. And if you’re not going to go all in and become an expert yourself, you need to have somebody that you can partner with, that you can use as a resource to get you the rest of the way there.

Brian (08:56):

Absolutely. We’re happy to be that resource regardless of where you are on that spectrum. If you want to dig deep, we can open up the engine and we can start taking engine parts apart and actually really go down to call options and the inner workings of an annuity. Most of the time that’s not the case. Most of the time the advisors have so much to do in terms of tax planning, estate planning, income planning, all these things. So they like to outsource things like that. And call me your back office annuity nerd. I’m very comfortable wearing that.

Steven (09:33):

So Brian, let’s talk about this a little bit more because I know what I’m looking for when I get a tax return and I want to review a tax return, not an annuity expert myself. So when you get an annuity contract for advisors listening, what are some of the things that I have my 37 point checklist on tax return reviews, what are some of those things on an annuity contract that people should be looking for every time?

Brian (09:50):

That’s a great question. First, we tend to look at when the product was sold. That gives me a general idea of what the interest rates were at the time that the product was sold. Then I’m going to be looking for is it a growth oriented product or is it an income oriented product, and how does it stack up with what is out there today? Obviously we’re looking at tax code, is it non-qualified or if it’s qualified, if it’s non-qualified, then it’s a little bit more restrictive in terms of what you can do because you’re probably going to keep it in an annuity to try to preserve the gains over the cost basis. If it’s an IRA, then you have, I don’t want to say limitless options, but you almost have limitless options if it’s just completely not appropriate for the client direct transfer it to a qualified brokerage account.

(10:39):

And then we’re going to do a little bit deeper dive, Steven, and we’re going to start taking a look at what are the charges on the annuity? Is there a mortality and expense charge? Is there a rider charge? What are the sub-account fees? If it’s a variable, if it’s a fixed, and basically just what are the additional bells and whistles? So from the statement, we can start to tease out why the product was sold at least initially, and then find if that still matches the client’s needs or not. Again, it’s all about the client and their needs, and if that tool fits that need, great. If there’s a tool that fits even better, great. It just allows that level of understanding and awareness to both the client and the advisor.

Steven (11:22):

Brian, I really appreciate that description. I’m all about processes and how people can repeat things. So especially for advisors who are like, Hey, I’m going to keep DIY in this. Just a couple of things that stood out to me there. As you’re talking about reviewing an annuity, you’re looking at the timing, not just when it started, but how rates have changed, interest rates have changed since then. We’re looking at what was the goal of the product and is that goal still being served? Does the client still have the same goal? Is it accomplishing that goal? We’re looking at the tax status. I love that you talk about taxes, kind of my thing, the tax guy, this is an area where I do see that at times, advisors I think will be a little bit too casual with, Hey, I’m not an annuity person, so whatever, we’re just going to move on.

(11:59):

You really need to understand what the tax implications of unwinding a product is going to be. And then I like that you talked about a couple other things they’re looking for. How are the charges set up? What are the potential fees? What does that look like if we decide to make a move? And then any other bells and whistles. So if you’re making your own list of here’s things I need to look at as I’m reviewing an annuity, those are definitely some things that should be there. Or you just need to know that, hey, I need to get the contract. I need to partner with somebody like Brian. You can go to retirementtaxservices.com/fia and we can get you connected with Brian. We can get you some resources around this. We’ll talk more about that before we wrap up. But I just wanted to highlight, here’s some things that if you’re making your annuity review checklist to go next to your tax return review checklist, here are some things that should absolutely be on there.

Brian (12:43):

Perfect. Yeah, and just a couple other things. How long is the CDSC? Back in the day, there were products that had…

Steven (12:51):

I’m going to pause right there, Brian, because I’m guilty of it all the time. Anytime I hear someone else use an acronym, we got to get paused and say, okay, for the uninitiated, we got to spell out the acronyms.

Brian (13:01):

Well, let’s just abbreviate it. Surrender charge.

Steven (13:03):

Perfect.

Brian (13:05):

Yeah. So what are the penalties for…

(13:08):

The client changing their mind, and not just the surrender charge, but what is the liquidity available? Because sometimes fines need money, but they don’t necessarily need income. They don’t need guaranteed lifetime income. So if the client needed some liquidity, is it there? And then of course you got to consider the tax plan of that product. Is that the most advantageous part of their portfolio to take that money from? You would know that better than I would.

Commercial (13:37):

Hey, advisors, it’s time to simplify your tax planning for 2025. Get your free RTS tax reference guide today. Created by our expert tax team and shaped by feedback from professionals like you, this guide is packed with up-to-date federal and state tax data you can trust. That state by state summary. It’s a game changer from client meetings to quick access at your desk. It’s the perfect resource to have on hand. Don’t miss out. Download your guide today at retirementtaxservices.com/taxguide. Happy tax planning.

Steven (14:12):

I really appreciate that you’re getting so specific on what we need to look at and how we go about this because unfortunately, it isn’t simple. You’ve looked at way more nudity contracts than I have, but I don’t remember ever seeing a one page contract. These tend to be a little bit lengthy and we need to know what we’re looking at. Either we need to know ourselves where again, we need to partner with someone who can help us through that.

Brian (14:34):

And we’ve got a number of resources to make it sound like we have the ability to keep all of this information in our heads. It would certainly be an overstatement, but there are Morningstar reports that we can dive into that really break down what the annuity is made, at least on the variable side. And on the fixed side, it tends to be more annuity rate watch or we pretty much have contracts with all the carriers. We can just go in and do some Google search or get on the company’s website and find out every company has a product that has its advantages and its disadvantages, and that doesn’t make it good or bad, it just makes information to be deciphered and again, return to the client to find out if it’s appropriate.

Steven (15:19):

Brian, you already commented on it to some extent, but this is an industry that’s known for its sales acumen. We’ll put it nicely that way. And so with so much information, with so many possible resources, so many possible vendors out there, how does an advisor even begin to vet a potential resource outside of, Hey, listening to a podcast and knowing that other advisors are having a great experience with somebody like Foundational Income Associates, if they hadn’t heard of you on this podcast, what’s that vetting process look like to make sure you’re getting great service as opposed to a nice sales pitch?

Brian (15:49):

It’s an insightful question. Most people will just start with the ratings of the carrier. The saying is, don’t take risk with your safe money. Most people choose annuities for safety or income. So I’m not saying that there aren’t B plus rated companies that do a great job, but there’s so much parody right now, Steven, with great product out there with A rated or A plus or even A plus plus. So that’s kind of the baseline where most people start.

(16:16):

And if you’re going to go below A minus, you might want to check with your authorities, whether that’s the RIA or just check with your E&O because sometimes E&O doesn’t cover carriers that are under A minus rated. And again, why would you take that risk? That’s the first place I would start is the ratings. And then we start to look at actual features of the product on an indexed annuity. What’s the cap? What’s the participation rate on the variable you’re looking at? Does it have an open architecture or are you’re going to get locked into some kind of bond portfolio based on market gyration? So there again, it’s very easy to slip into analysis paralysis where you’re just like, okay, I spent 20 minutes Googling and I got five different answers. And that’s when we would say, you don’t need to do that. Just call us. It doesn’t cost you anything. We’re not going to hit you with a hard sales pitch. We’re interested in a relationship and helping you and your client. You don’t have to know it all. You just have to know my phone number.

Steven (17:14):

Brian, I like that you brought up E&O coverage because compliance gets brought up a lot around tax planning. And what’s interesting to me is that a lot of advisors will hesitate to get involved in taxes because they’re worried about inadvertently giving tax advice and getting sued for it. And I don’t want to be sued either. I get that concern, but when I talk to E&O providers, what they tell me about cases where they actually have to pay out claims related to taxes, they don’t give me stories of advisors who were being intentional and proactive about tax planning and then got sued because of a recommendation they made. They give me examples where advisors were too casual or unintentional about what they were doing and inadvertently created tax ramifications. And that comes up around annuities as well, that when advisors don’t take the time to either be an expert themselves or partner with an expert who can help them understand the tax implications, the surrender charges, all of those things involved in potentially changing products, and then they unsuspectingly create this tax event, and that’s what they end up getting sued for.

(18:25):

And so like I said, really appreciate that you brought up the e and o coverage, not just from a standpoint of this great reminder on, Hey, are you going to still be covered? But it’s just a good reminder for us that if you are a financial advisor, you have a responsibility to understand the full ramifications of the recommendations you’re making, including the tax implications, even if you are not a tax professional.

Brian (18:46):

Absolutely. You do see it happen, particularly with non-qualified annuities where they’ve been in an annuity for a long time. Let’s say they put in a hundred thousand dollars and over a certain number of years, maybe it’s got another a hundred thousand dollars of gain. New advisor that or insurance agent doesn’t necessarily think about that and they entice the client to cash surrender the policy, and they don’t realize that it’s last in, first out, it’s LI O and now the client has ordinary income tax on a hundred thousand dollars of gain that could very well put them into another income tax bracket. And there are so many different options to handle that problem if the existing product isn’t right for them without sacrificing the gain over the cost basis. We see that probably more than we would like to, not necessarily in terms of sales at FIA, but we see and hear about clients that didn’t know any better, their advisor didn’t know any better, and now they’re trying to figure out how they unwind this. And the insurance companies are reticent to get themselves involved because they don’t want the liability, Hey, you asked for it to be surrendered, here’s your money.

Steven (19:51):

Yeah, we do see that a lot across the spectrum, whether it’s with annuities or tax qualified accounts, IRAs 401Ks, the policy holders, the custodians. It doesn’t seem like they have a lot of mechanisms in place to say, hold the pump, the breaks. Have you really thought about this? They’re like, yep, here’s your money, Brian. It wouldn’t be a podcast on taxes without throwing out at least a couple of numbers as a reference point that sound vague on their own. So as we’re talking about this, talk to us about 1035 exchanges.

Brian (20:17):

It’s interesting, one of my first jobs in the insurance industry was working in a transfer and exchange department moving money from other companies. And I learned very quickly that 1035 exchange is thrown out across the industry as moving an annuity to an annuity.

(20:35):

That’s not actually technically correct. A 1035 exchange is actually part of the tax code that refers to a non-qualified annuity or a life insurance being transferred into another non-qualified annuity. And it’s very specific. You have to have the same owner and the same annuitant in that transfer. And by doing so, the IRS allows for a preservation of cost basis and a preservation of gain. And so in that same example where you’ve got a hundred thousand dollars of cost basis or principal and a hundred thousand dollars of gain when it moves to a new carrier, you get the same a hundred thousand of gain and a hundred thousand dollars of basis if you will. The insurance companies are required to send out a cost basis letter and oftentimes they don’t. So it’s incumbent upon the advisor in that process to make sure that they talk to the seeding carrier about providing the cost basis letter if not the new carrier. They don’t know. They don’t know what part of that contract is cost basis or gain. And that’s another kind of a tax trap where all of a sudden the receiving carrier says, well, it’s all gain. And if they don’t get that basis moved over, now you’ve got a potential double taxation system, which nobody wants that.

Steven (21:58):

No no’s got to be the worst way to tip the IRS is double paying taxes on the same income. Brian, let’s talk just a little bit more about this because I mean, you can correct me if I’m wrong, but this is very much an area where we need to have a plan upfront. This isn’t something that after the fact we go back and say, wait, no, no, nevermind. I wanted to elect this differently. We need to understand how we’re going to move this and what the process is, how the money actually gets moved, all those kinds of things. Otherwise we can inadvertently create taxable events that we hadn’t planned on.

Brian (22:29):

Oh, absolutely, absolutely. And if we’re looking at the other side, Steven, you’ve got qualified money and sometimes advisors say, oh, don’t worry about that. You’ve got a 60 day rollover, not realizing that the client has already used one that year. It’s a calendar year. So to understand the process and consequences, and we use consequences typically in a negative light, but consequences can be good where money moves from one carrier to another carrier and there is no taxable consequence. That’s what the client expects. So to understand the process, to understand the verbiage, the difference between a 1035 exchange and a direct transfer, little mistakes have big consequences, and we don’t want to have to call our E&O carrier.

Steven (23:12):

No. And unfortunately, as we’re recording this, I’m aware of a couple of different situations actively going on for advisors. I know that they had a plan for how something should happen. It happened just a little bit different, and now there’re these big tax liabilities that they’re trying to figure out a way to either undo or potentially they’re ending up reaching out to their E&O providers. And so we’ve got to make sure we’ve got very clear plans for how these things are going to happen, or there’s big consequences.

Brian (23:40):

Absolutely. I see another thing where people, they love to use trusts, but they don’t necessarily understand the consequences of incorrectly using a trust.

Steven (23:51):

Yeah.

Brian (23:52):

They put the trust as the beneficiary, but not the owner doesn’t make any sense. They put the trust as the owner, but not the beneficiary. Doesn’t make any sense. And a couple of years ago, I heard about a scenario of an advisor in South Carolina that was doing that inappropriately, and they skipped the family member that they actually were trying to pay the money to, and of course they went and filed a claim. So there’s a lot of little nitpicky things that you got to get right, but they’re not difficult. You just have to know your resources

Steven (24:29):

Well, and on the topic of resources, I mentioned it earlier, but if you go out to retirementtaxservices.com/fia, Brian’s team has put together a great resource that really just illustrates some of the options to consider depending on the type of annuity that’s in place and what you can potentially do with it. Just so again, we start expanding this awareness of what should we even be considering. So that’s a free resource. Anybody listening can go and download retirementtaxservices.com/fia. And then of course, from there, if there’s looking for somebody to partner and come alongside you, Brian and his team are happy to help and really dive into the weeds.

Brian (25:04):

Absolutely. Yeah, take a look at it. It’ll give you some good scenarios of what things look like and what potential options are out there for your client, and then you can just direct any questions to us. We’d be happy to help.

Steven (25:16):

Love that. Well, Brian, I really appreciate you coming on and sharing your expertise. As I think about the conversation we’re having today, I mean, some of the things that really stand out to me is that I’m with you, that this should be just accepted as part of the responsibility of a financial advisor to understand the implications. And again, you don’t have to be the full expert on your own, but you have to understand enough to at least be able to request these documents to get it to the right person to make sure that we’re reviewing these things. We’re not just taking for granted that it’s all going to magically work out the way we want it to, because if we don’t have an intentional process, we’re exposing ourselves and our clients to a lot of risk of unintended consequences.

Brian (25:54):

And in fact, I was having a discussion with your brother not too long ago, and he told me that in his discussions with e and o companies, one of the biggest problems they had was that people were actually not reviewing their client’s existing annuities. And when the client find out how things had changed or things had gotten better or different, it’s a hilarious term and it’s clearly a compliance made up term, but they call it reverse churning, and I had never heard that before. Reverse churning and meaning, you’re not really doing anything with it. It’s just sitting there and you’re not looking at it and reviewing it. But I thought that was interesting that that’s one of the biggest things that companies are looking at today, or one of the biggest things that the claims that they’re processing are advisors that are not looking at their existing book. Well, you don’t have to do that anymore. We can help you.

Steven (26:45):

Wow. And I love that because I’m a huge fan of specialization. I’m a huge fan of what advisors are able to do, being in the driver’s seat, being the quarterback, whatever analogy you want to use. Financial advisors tend to be in a great position to help coordinate different experts in a client’s life to make sure these things are all taken care of. But you need to know where those resources are, where you can turn for help, which is Brian again, why we’re excited to bring you on the podcast and to offer that resource at retirementtaxservices.com/fia. And then of course, everyone can come meet you in person and learn more about a lot of this great stuff at the summit this year, September 30th through October 3rd. You can go out to retirementtaxservices.com and get signed up if you haven’t already. It’s going to be a fantastic event. We’re really looking forward to doing that again this year.

Brian (27:30):

Oh, it was amazing. The advisors that I met and the work that we did in the conference room talking about goal planning and your action steps to get there. I was there as a wholesaler, so I thought I was going to just sit back and watch, and then Micah came over and said, no, no, you’re doing it too. And I went, okay. It was great. Yeah, the summit was something to behold for sure.

Steven (28:00):

Wow. We certainly appreciate that. It takes great partners to make it happen. Well, again, Brian, really grateful that you would come on the show and to everyone listening, really appreciate you being here. And until next time, good luck out there. And remember to tip your server, not the IRS.