SPIA Wealth Replacement Strategy

Situation

The purpose of this strategy is to provide the client with a consistent, guaranteed lifetime income stream while maintaining the asset value off of his balance sheet. This strategy would allow the client to move assets out of his taxable estate and utilize a mortality arbitrage opportunity that would significantly increase the net amount of dollars that will ultimately be passed to his heirs.

Client Snap Shot

Male, age 74 (assumed Standard Health)
$35,000,000 - Net Worth
$18,000,000 - Investment portfolio (bulk of assets in non-liquid stock)
$12,000,000 - Estimated Estate Tax (considerable estate planning already done)
$450,000 - Net after tax annual income need

Strategy Concept

Part 1:

Take $4,000,000 out of liquid bond portfolio (at the time was yielding approx 2.3%, with risk of principal) and purchase a $4,000,000 Life Only, Single Premium Immediate Annuity (SPIA) resulting in:
      $410,981 Gross annual payment to client (gross return of 10.27%)
      $30,941 Estimated Income Taxes on gross annual payment
      $380,040 Net Income to client (net return of 9.5%)

Part 2:

Purchase a $4,000,000 Guaranteed Lifetime insurance policy with a level premium to replace the assets used to purchase the SPIA. This policy is owned by a trust so that the proceeds are excluded from the clientÕs balance sheet at death and thus not includible for estate tax purposes.
$180,290 - Guaranteed lifetime premium for $4,000,000 policy

Results of SPIA/WRT

- Reduced the clients net estate by $4,000,000, saving his heirs approx. $1,800,000 of potential estate taxes
  Life Only SPIA payments stop at annuitants death, thus no value for estate purposes
- After insurance premium is paid, the client nets $199,750 (net/net return of 4.99%) of income
  Provides over 44% of total after tax income need, guaranteed for his lifetime
  Client has sufficient other income for remaining need
  $4,000,000 Death Benefit is excluded from estate and payable to his trust
- Increased his yield by approx 117% (4.99% up from an average of 2.3%) after insurance premium is paid
  This yield is guaranteed by SPIA payment and guaranteed level life insurance premium
  No risk of principal

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