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David M. and Judy B. Jones Scholarship Fund: Supporting our community one student at a time

shutterstock_70975837At David M. Jones & Associates, we understand the importance of planning for the future. While we may specialize in serving clients 60 years old and older, planning is typically to benefit younger generations. That’s why we believe that funding the education of future business leaders is so important.

The price for obtaining an education is on the rise. Expenses for attending a four-year college in pursuit of a degree typically ranges from $28,000-$68,000 per year and is anticipated to increase in coming years. The rise in college tuition has proven to be difficult for many families to afford and has compelled many to rely on financial aid to cover the costs.

When it comes to receiving financial aid, the disparity between a family’s household income and qualification for financial aid coverage appears to be hitting middle-class families the hardest. A problem that many families are facing is that they have become too poor to afford college tuition, yet too rich to qualify for financial aid. When considering financial aid, the government chooses how much of the tuition the family is capable of paying based on the family’s income and then compensates the remaining amount. Therefore, a middle-class family’s household income can easily prevent the student from obtaining a higher level of funding.

2015-Scholarship-WinnersIn order to meet the needs of these middle-class families and bridge the financial gap here in our own community, the David M. and Judy B. Jones Scholarship Fund was founded in 2009. The goal of this fund is to provide promising students with a chance to be free from academic loan debt and to focus on furthering their educations. Each year, these scholarships are awarded to students of high academic standing and are designed to assist students that come from low-income or middle-class families that cannot afford the financial burden of a college degree. Through this scholarship foundation, students are awarded either a $5,000 scholarship that is renewable for four years, or a $2,500 non-renewable scholarship.

Since its launch, we’re proud to have awarded 50 students with more than $400,000 in donated scholarship funds to pursue their dreams of a college education. Most recently, we presented seven 2017 graduating Barron Collier High School seniors with $50,000 in scholarship funds to support the costs of college tuition, books and student housing.

Our company is honored to play a role in these students’ educational journey. There is no better feeling than helping a hard-working student further their education and follow a path that will lead to success. This experience has inspired our business, encouraged scholarship recipients, and comforted the families of these hard-working students by giving them peace of mind in knowing that their child will receive the education that they are working so hard to obtain.

At David M. Jones & Associates, we encourage you to think ahead and prepare for the educational future of your children and grandchildren. Through a life insurance policy, you can choose to set aside money for loved ones to help alleviate the financial burden of paying for college. If you would like to schedule a consultation to discuss your options, contact our office today by calling 239-649-7600 or sending me an email at

Annuities: A great investment or a ticking time bomb in your estate

Many retirees have discovered the apparent value of owning tax deferred annuities. However, the possibility of the gain being subject to state and federal income tax, the new Medicare 3.8 percent tax, and the possibility of Federal Estate Tax at the death of the contract owner (annuitant) have created a sizeable tax burden for surviving spouses and children.

There are significant tax advantages that lure retirees to invest in annuities. Normally, all growth and gains on the policy are tax deferred until the contract owner makes a withdrawal. The gain is taxed at the time at ordinary income tax rates. For most investors, these funds are not necessary to live on; therefore they realize many years of tax deferred growth.

The explosion in annuity sales is largely due to the popularity of “indexed” annuities which offer the investor an opportunity to earn a return that is correlated to the S&P 500 index (or other world indexes). The biggest benefit is that they offer downside protection. If the index drops 20 percent you would earn zero and reset for the following year.

Almost all deferred annuities are offered without front-end load but require the owner keep the policy a certain number of years to avoid early surrender penalties. Annual costs vary depending on options and riders selected. Long-term care, critical illness, guaranteed income and enhanced death benefit riders are some of the more popular choices for buyers today.

Investors are very interested in any opportunity to delay paying income tax. In California, a married taxpayer only needs to have $67,751 of taxable income to be in the States 9.3 percent income tax bracket (that goes all the way up to 13.3 percent for higher income earners). Having the ability to have a sizeable sum grow tax deferred for a long period of time has appeal. Couple that with no required distribution at 70 ½ like IRA’s and other qualified plans, provides the annuitant with unlimited “paper” growth.

The “end game” in annuity distributions has always been challenging. The design of these policies was for someone ideally in the 40-55 year old range that was in their peak earning years. Deferring income tax while you are in your top earning years makes sense. When you retire, you may be in a lower income tax bracket (not always of course) and could then withdraw the annuity earnings and hopefully pay income tax at a lower bracket while also having enjoyed the magic of tax deferred growth. Annuity income is treated as “gain out first” to the annuitant.

This model annuitant story does not always play out as illustrated above. Many new retires find that they do not need the income and do not want to have to pay tax if they do not need the money. These polices are also sold to wealthy retirees who have more to invest and would like to lighten their income tax burden on monies they do not need for the foreseeable future.

Both cases cause us to ask the question; when will you ultimately pay income tax (and potentially other taxes) and are there any other alternatives?

At age 60, Jim invested $250,000 in an annuity that has done fairly well over the last 18 years. It is now worth $1,000,000. Now at age 78, Jim is not in need of any additional income and does not want to have to pay more State and Federal tax. With $750,000 of gain, this is subject to the top California income tax of 13.3 (he has other income), the top Federal income tax bracket of 39.6 percent plus the new 3.8 percent Medicare tax and potentially Federal Estate Tax of 40 percent if his estate is over $5,430,000. I will let you and your CPA do all that math, but what you find is this was not a good tax scenario to build up all this gain.

He has a few options that he should consider:

  • Annuitize the money over your lifetime (and maybe a spouse’s lifetime). This involves the insurance carrier paying you back systematic payments of principal and interest over your lifetime. You still have to pay income tax but better to spread it out over a longer period of time.
  • Do the same as above, except take these after tax payments and consider buying a life insurance policy on you and or your spouse’s life. The benefit from the insurance will be Income and possibly Estate Tax free to your beneficiary and likely will be much more than the annuity could have ever grown to! This is a viable strategy up to age 85.
  • Wait until you die and let the beneficiary evaluate their options. Which are:
    • Pay tax on all the gain at your death;
    • Most carriers will allow an additional five years deferral by the beneficiary but then force distribution;
    • The beneficiary can annuitize the money over their lifetime. This might make a lot of sense for someone with a child or children that they want to provide lifetime income after they die.

As I hope you can see, deferred annuities have many great investment components and options but can turn into a tax time bomb if not planned for properly. You should consult your financial planner, CPA and estate tax attorney when deciding on this type of purchase.

The Power of Life Insurance in a Trust

For most of us, life insurance is a stand-alone product, a means of monetizing the insured’s life value at the time of his or her death and thereby supplementing his or her estate. However, this benefit can be greatly increased when life insurance is placed in a trust.

Whether the trust is revocable or irrevocable, each goes into effect while you are still alive, although assets placed into an irrevocable trust typically can not be retrieved by you but are not taxed in your estate at death.

Revocable Trusts
Also known as Living Trusts, revocable trusts provide an excellent vehicle to avoid probate which, in turn, reduces legal fees, minimizes privacy issues and puts your bequests into the hands of your heirs more quickly and efficiently.

However, revocable trusts typically will not shield your estate from federal tax, but merely provide benefits while you are alive as noted above and hopefully make for a smoother transition of assets when you die.

Irrevocable Trust
Also known as an Irrecovable Life Insurance Trust, ILITs are specifically created to own life insurance but can own other investments also.
The ILIT becomes both the owner and the beneficiary of one or more life insurance policies typically written on the life of the grantor (the creator of the trust). When properly structured, proceeds from that life insurance are not subject to income tax or estate tax upon the insured’s death. Administration of the ILIT must be done by an independent trustee (not the grantor of the trsut)

Here’s how they work:
The grantor sets up a trust for the benefit of his heirs and funds it through annual cash contributions. The gifting limits, adjusted annually for inflation, are $15,000 per beneficiary for this year (2018). If the grantor were to name three beneficiaries, for example, he or she could gift a total of $45,000 ($15,000 x 3) to the trust in the current year. )If he were married this could be $90,000 per year)
The grantor could also choose to gift all or part the lifetime exemption amount which is currently $11,200,000.

The Power of Life Insurance

Now here’s the power play. Regardless whether the grantor makes annual contributions, or gifts a partial or full lifetime solution, he or she could put that money toward the purchase of life insurance. Why? First of all, the return on investment is guaranteed to be many fold over the total amount of the contributions made. For example, an annual contribution of $45,000 will support as much as a $1,750,000 life insurance benefit for a healthy 70 year old man. Secondly, that benefit will be passed on to the heirs income and estate tax-free.

Indeed, there is not a safer, more profitable way of investing your trust funds than through the purchase of life insurance in an irrevocable life insurance trust.

ILITs have other advantages as well:

1) Liquidity – for estate taxes and other expenses (remember, death benefits are received income and estate tax free by the trust);
2) Equalization of inheritances / transfer of a family business;
3) Creditor Protection – proceeds from life insurance received by the ILIT are protected from creditors with rare exception; and,
4) Asset Management – By using a trusted advisor, trust company or appointed family member as trustee, the ILIT provides effective management of insurance proceeds which in turn provides added peace of mind for the grantor.

Most larger estates will utilize both revocable and irrevocable trusts and some non-taxable estates may still benefit from the revocable trusts.

But in the world of estate planning, the ILIT reigns as one of the most powerful planning tools for minimizing federal estate taxes and / or paying those taxes with tax free life insurance proceeds.

As always, the advice of a wills and estate attorney together with other advisors (CPAs, CFPs, and life insurance experts) is vital in optimizing your estate plan.