Annuities are tax deferred savings contracts that are usually written by insurance companies.  The owner of the contract makes a payment or series of payments to the issuer or insurer and in return the insurance company promises to make a payment or series of payments to the contract owner in the future.  Although they have a reputation for having high fees, they can be advantageous in a variety of situations, including tax deferral as well as insuring against longevity risk of the annuitant and/or owner.  Unlike qualified plans such as 401K and 403B plans and IRAs, there is no annual limit to how much can be contributed to an annuity contract.

Tax deferral

Annuities allow the contract owner to defer taxes on gains inside the contract until their withdrawal.  When withdrawals are made, they are subject to first in first out (“FIFO”) reporting, in that the gains will be deemed to have been withdrawn first, and will thus be subject to taxes.  The contract owner will be subjected to a 10% penalty on withdrawals if the withdrawals are made prior to age 59 1/2.  Taxes on the gains upon withdrawal can be deferred and paid on a prorated basis by taking withdrawals on a periodic basis.

Management of longevity risk

Annuities provide a way to protect the contract owner against longevity risk.  As an example, consider an individual who, at retirement age, has a lump sum which needs to last through retirement.  If the retirement income strategy is to withdraw income only and preserve the principal, then there are no issues and an annuity may not be suitable or necessary.  However, if the retirement income strategy is to withdraw the lump sum gradually over many years, it is difficult to assess how much should be withdrawn as there is no way to know for how many years the withdrawals will be needed.  An annuity can protect against this uncertainty by making payment until the death of the annuitant.

Certified financial planner

The Certified Financial Planner™ (CFP®) designation is a professional designation which is frequently held by financial planners, investment advisers and other financial advisers.  It is conferred by the Certified Financial Planner Board of Standards, Inc.  Candidates must have a bachelor’s degree (or higher) from an accredited college or university, three years of full-time personal financial planning experience and complete a course of study in financial planning topics.  These subject areas include investments, taxes, estate planning, insurance planning, employee benefits, and asset protection.

A candidate may be exempt from the course of study requirement if he or she holds a CPA, ChFC, CLU, CFA, Ph.D in business or economics, a Doctor of Business Administration, or an attorney’s license.

All candidates must successfully complete the CFP® Certification Examination, which has a reputation for being very challenging, comprehensive and arduous.

CFP® practitioners are subject to the CFP Board’s ethical standards, and must abide by a fiduciary standard.

Certificants must typically complete 30 hours of continuing education every two years, and 2 hours of these 30 hours must be in topics related to ethics.

In many jurisdictions, the CFP® designation will exempt an investment adviser representative from having to pass the Series 65 examination.


Trusts provide a way to preserve and protect assets, as well as pass assets to heirs outside of the probate process.  They are frequently utilized in estate planning to minimize estate taxes.  They can also be used to protect assets by moving assets away from the grantor.  Trusts are typically formed under state law, however unlike corporations and LLC’s they are not usually registered with the state in which they are formed.

Trusts usually have grantors, trustees, and beneficiaries.  The grantor contributes assets to the trust and executes the formation of the trust.  The trustee is designated by the grantor, who manages the trust assets for the benefit of the beneficiaries according to the terms laid out in the trust.

A trust can be revocable or irrevocable.  A revocable trust, frequently referred to as a living trust, allows the grantor to retain control of the assets while at the same time allowing those assets to pass outside of the probate process.  A revocable trust typically does not enable the trust assets to avoid estate taxes.

An irrevocable trust, on the other hand, involves the transfer assets out of the grantor’s name and typically causes the grantor to lose control of those assets.  Because these assets are transferred out of the grantor’s estate, they typically avoid estate taxes in many circumstances.

Life insurance taxation

Life insurance taxation is an important subject as relates to your overall financial situation.  Life insurance contracts have several tax features which make them unique and advantageous as an asset class.  We will discuss several aspects of life insurance taxation.  We will discuss tax advantages of life insurance here related to the death benefit, the withdrawal or surrender of the cash value, and the dividends from the policy.

Taxation of the death benefit

Death benefit payments are typically paid income tax free to the beneficiary.  They can, however, be subject to the estate tax.  There are various strategies for managing the estate tax liability including irrevocable life insurance trusts (“ILITs”).  This is a complex subject and we emphasize the importance of consulting with the appropriate advisers in carrying out such estate planning strategies.

Taxation of cash value upon withdrawal or surrender

The cash value of the life insurance policy can be withdrawn tax free up to the basis of the policy, after which point the cash value is taxed.  This is a unique and advantageous feature of life insurance and is known as the first in first out (“FIFO”) convention.  It is important that the life insurance policy meet certain requirements in order to qualify for FIFO treatment.  If a life insurance policy is over funded as per these rules it could be classified as a modified endowment contract (“MEC”) which would deem it to be treated as an annuity for tax purposes, which would include last in first out (“LIFO”) treatment of the gains as well as a 10% penalty for early withdrawals (prior to age 59 1/2).

Taxation of dividends

Unlike taxes on dividends from capital assets such as stocks, bonds, and mutual funds, taxes on dividends from life insurance policies are deferred until their withdrawal, and are subjected to first in, first out treatment.  This is another unique and advantageous feature of life insurance which distinguishes it from other investment asset classes.

Gift and estate taxes

Taxes are levied upon a decedent at both the federal and state level.  At the state level, such taxes are commonly referred to as inheritance taxes while at the federal level such taxes are commonly referred to as estate taxes.

Estate taxes

The estate of the decedent is subject to estate taxes if it exceeds certain an exemption threshold, which is $5,430,000 for an individual and $10,860,000 for a married couple for the 2015 tax year.  The size of the estate can be reduced by making gifts up to the the annual exclusion limit ($14,000 per person in 2015).  Gifts over and above this exclusion limit will trigger the gift tax and will require that a gift tax return be filed.  Gifts to certain persons and entities can be unlimited and are not subject the the annual exclusion limit.  These include gifts to your spouse, gifts to certain charities, gifts related to certain higher education expenses, and gifts related to certain medical expenses.

Wills, trusts, and estates


A trust is a legal entity created under state law which allows trustees to manage assets on behalf of beneficiaries.  They are oftentimes constructed in order to control, restrict or limit access to the trust assets.


An estate is a legal entity which is created upon either a bankruptcy filing or the death of an individual, and consists of all of the assets and liabilities of the individual.

Life insurance

Life insurance policies are contracts which are designed to protect the income or assets of the insured person in the event of his or her death.  There are many different types of policies including term insurance, whole life insurance, and universal life insurance.  We will briefly review each of these types of policies here.

Term Insurance – rental of coverage

With term insurance, the coverage is paid for a number of years, after which point the policy either terminates or becomes prohibitively expensive.  Term insurance is usually used to protect the income of a wage earner supporting children or debt such as a mortgage, and is typically the least expensive type of life insurance coverage.  The most significant advantage of term insurance is its low cost and its most significant disadvantage is its temporary nature and the fact that it usually will cover a person only in their younger years, when a claim is less likely to be filed.  Having term insurance is sometimes referred to as “renting” coverage as the policy holder does not have any equity in the policy and only pays for the coverage for the amount of time for which it is in force.

Whole Life Insurance – purchase of coverage

Whole life insurance is frequently referred to as “permanent” insurance, in that the coverage will remain in force for the duration of the insured’s life, as long as the premiums are paid.  This type of coverage is usually used in estate planning, and is typically the most expensive type of insurance.  Many types of whole life policies are “participating”, in that the policy holder is entitled to receive periodic dividends from the insurance carrier.  Whole life policies have a cash value which can be accessed by the policy owner by means of withdrawals, surrender, or loans.  Cash value growth inside life insurance policies is tax deferred and is subject to first in first out (“FIFO”) treatment as long as certain requirements are met.  What this means is that the tax free basis is withdrawn prior to the gains in the policy, so the policy owner will only be taxed when the amount of the withdrawals exceed the basis in the policy.  The “guarantees” provided by whole life policies are backed by the general account of the insurance carrier.  This is in contrast to the separate accounts of universal life insurance policies (discussed below), which are titled in the name of the policy holder.  Having whole life coverage is frequently referred to as purchasing coverage due to the fact that the policy holder builds equity in the policy.

Universal Life Insurance – flexible coverage

Universal life insurance can be permanent or temporary depending on how the policy is managed by the policy holder.  Premium payments are flexible, and the policy will last as long as the policy remains funded.  The policy is funded by means of the policy holder making premium payments as well as earnings inside the policy.  Similar to whole life insurance, universal life insurance has cash value which can be accessed by the policy owner by means of surrender, withdrawals or loans.  The sub accounts of a universal life policy are typically titled in the name of the policy holder and are thus not invested in the general account of the insurance carrier.  Universal life insurance can be used for a variety of purposes including estate planning, income protection and debt protection, and its cost depends on how the policy holder chooses to manage the policy.  There are several types of universal life insurance coverage including fixed and variable.  With a variable universal life insurance policy the funds inside the policy are invested in stocks, bonds, and other investments, and with a fixed universal life insurance policy the funds inside the policy are invested in fixed interest bearing accounts.