Laddering Fixed Annuities for Cash Accumulation

The July issue of Advisor Today introduces a unique cash accumulation strategy that merits close attention: laddering fixed annuities. MassMutual has back tested the strategy against several traditional strategies, and demonstrated its strength.

The strategy is simple. In addition to a portfolio of equities and bonds, simply make an initial purchase of a life-only fixed income annuity, with additional proportional fixed annuity purchases annually. Over a twenty-seven year period, the strategy resulted in a liquid account value of more than seven times the original deposit. This compared to an account value of only five times the original deposit when invested in a traditional equities and bonds only portfolio.

While the common misconception is that the inclusion of a fixed annuity in the mix impairs the liquidity of the portfolio, the performance over the intermediate and long-terms certainly made the short term illiquidity a risk worth taking.

Consequently, a retirement plan may benefit from the use of three asset classes- equities, bonds, and fixed income annuities. Retirees can build more wealth by making incremental annuity purchases with assets transferred from mutual fund accounts, for example.

The strategy also greatly increases the safety of the portfolio. Fixed income annuities are safe. They also are, in many states better protected from creditors. One would think these benefits would only be icing on the cake, given the strategy can outperform a traditional portfolio.

But the real icing on the cake, is building for your clients the opportunity to guarantee a stream of income that your clients cannot outlive. In these years of increasing life expectancies, the real "treat" is ensuring that the client can live the reminder of his or her life without concern whether the money will run out.

In August 2007, in the articles section of the Estate Planning Information Center, I reported about a study, co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company, identifying lifetime income annuities as the most cost-effective and least risky asset class for generating guaranteed retirement income for life.

The Wharton academic study revealed that:

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  Income annuities can provide secure income for one's entire lifetime for 25-40% less money than it would cost an individual to provide a similar level of secure lifetime income through traditional means, thanks to an insurer's ability to spread risk across large numbers of people;
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  Consumers are not annuitizing enough of their portfolios even though income annuities are low-cost, available from creditworthy insurers, and provide guaranteed payments for life. Equities, fixed income and other investment products like mutual funds carry the risk of outliving one's nest egg;
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  By covering at least basic living expenses with income annuities, consumers have much greater flexibility in other areas of a retirement plan, including the ability to take more investment risk with the remaining portfolio; and
• Recent innovations in income annuities, such as annual inflation adjustments, legacy benefits and access to capital in emergencies, have helped elevate the products to a desirable asset class in retirement.

The findings are outlined in a paper entitled "Investing Your Lump Sum at Retirement," which is based on an academic study entitled "Rational Decumulation," co-authored by Professor David F. Babbel of The Wharton School and Professor Craig B. Merrill of The Marriott School of Management at Brigham Young University. The study explored financial options for retirees and compared income annuities with other asset classes in retirement.

"Living too long is fast becoming the major financial risk of the 21st century," said Professor Babbel. "Combined with the challenges facing Social Security and the decline of corporate pensions, this adds up to a 'perfect storm' for retirees who might outlive their retirement nest egg."

Only lifetime income annuities can in an efficient way protect from the risk of outliving assets. This simply cannot be duplicated by other types of investments.

Caregiving Complicated By Late-In-Life Marriages

Disputes with Step-Children Increase Risk of Guardianship and Institutionalization

Mrs. Staffler calls her step-daughters to inform them that her husband, their father, has been admitted to the hospital following a massive stroke. As they gather in the hospital, it quickly becomes clear that the eldest daughter has been selected to give Mrs. Staffler some chilling and unexpected news. "You are not making decisions for our father; as his daughters, we will decide what needs to be done for him."

Feeling betrayed and offended, Mrs. Staffler rushes home to retrieve the health care power of attorney which appoints her as attorney-in-fact to make health care decisions. Armed with what she trusts is a clear statement of her authority, she returns to the hospital to find that the step-daughter has an attorney, and a caseworker from adult protective services awaiting her. In the ensuing battle, the stepdaughter is appointed guardian for her father by the probate court, and Mrs. Staffler is forced to hire an attorney to prevent the court from appointing a guardian for her.

Although she is successful in maintaining her freedom and independence, her legal expenses exceed fifteen thousand dollars. Moreover, although Mrs. Staffler assumed that she would have access to her husband's estate to care for her in the event of her husband's death, it is now apparent that the step daughters want their to inherit from their father's estate immediatelyupon his death.

Trust Scammers Refuse to Pay Penalty; Hurl Insults at Court

James Nash reports in the Columbus Dispatch that the Ohio Supreme Court's attempts to collect more than $7 million from two companies accused of scamming senior citizens are not going well.  According to the Columbus paper, the court on Monday handed off the collection action to the office of Attorney General Richard Cordray, who employs lawyers and others to shake loose money from reluctant debtors.

Jeffrey and Stanley Norman, owners of two companies that were fined $6.4 million Oct. 14 for having non-lawyers perform legal functions as part of an alleged trust-mill scam targeting the elderly, now owe more than $7 million with penalties for non-payment.  The Normans unsuccessfully tried to get the Supreme Court to rehear the case, but "[w]hen that failed, Jeffrey Norman lashed out at the court, accusing justices of a 'disgusting abuse of power.'"

Reportedly, Norman has said he would not pay the fine, calling it unfair, and he has put his southern California home on the market for $4.9 million.  Even if the state does collect the money, the proceeds won't go directly to victims of the alleged scam. The funds, under court rules, go toward the cost of investigating allegations of unauthorized practice of law, continuing legal education and other purposes.

The Normans were principals in the American Family Prepaid Legal Corporation scheme that resulted in The Ohio Supreme Court instituting a civil penalty in excess of six million dollars.  I wrote about the Court's action last November (2009), under the blog entitled "Court Imposes $6.3 Million Civil Penalty on "Trust Mill" Companies and Owners."

BIOGRAPHY

Monty L. Donohew is an attorney concentrating his practice in estate planning, wills, trusts, succession planning, and probate, with an emphasis on strategic trust planning. His firm, Monty L. Donohew, LPA, has offices in: Green, Ohio (Akron, Canton); Beachwood, Ohio; Westlake, Ohio; Dublin, Ohio; Cincinnati, Ohio; and, Chesterfield, Missouri (St. Louis).

Monty received his Juris Doctorate from Washington University School of Law in St. Louis, Missouri, where he served on the Washington University Law Quarterly, Washington University's most prestigious law review. Monty has been admitted to practice in Ohio, Illinois and Missouri, and currently practices in Ohio and Missouri. He is a member of several local and state bar associations.

Monty graduated from Tallmadge High School in Summit County, Ohio. He received his B.A. in political science from Eastern Illinois University, where he attended on a full academic scholarship. Monty was an intercollegiate debater, and received numerous individual and team awards, including placing second at "Novice Nationals," a national tournament for freshmen debaters, and qualifying three times for the National Debate Tournament. While at Eastern Illinois, Monty was an award winner in the annual social sciences writing competition, and received a coveted appointment to the Student Legal Services Board after serving as a student legal intern.

Monty is a member of the National Academy of Elder Law Attorneys, Inc. (NAELA). He is also a member of the National Family Caregivers Association, and the National Care Planning Council.

You can learn more about Attorney Donohew, his practice, background, credentials and education at the Estate Planning Information Center, http://www.donohew.com/. You can follow his blog at http://estateplanningcenter.blogspot.com/.

Bankruptcies Hit Retirement Communities

The recession is hitting elderly people where they live, literally. Financial problems have been mounting at a number of assisted-living and continuing-care communities, forcing some facilities into bankruptcies and inflicting new worries on residents and their families who thought their life plans were comfortably set.

In recent weeks, Erickson Retirement Communities, which manages 19 continuing-care retirement communities in 11 states, declared bankruptcy. Sunrise Senior Living Inc. posted a quarterly loss of $82 million and announced plans to sell off 21 of its assisted-living communities. Nationally, smaller retirement communities are raising their prices, changing the way they operate, selling themselves off to bigger chains, or getting out of the business altogether. Many companies say they can't make a profit—or even succeed on a nonprofit basis—in an environment that combines the high cost of caring for elderly residents, restrictive Medicaid budgets, tight credit markets and fewer residents willing and able to pay top dollar for their care.

When a facility fails, it can have myriad effects on the residents. The good news is that no one gets kicked to the curb–at least not right away. "Nobody has ended up on the street, which is a primal fear when you're dealing with these places," says Jason Frank, an elder-law attorney in Baltimore. "But their fees can skyrocket, and they can become unaffordable. Then they can kick you out for nonpayment."

In some cases, residents may find that the sizeable deposits they made to get their apartments in the first place have disappeared. (Continuing-care communities like Erickson's typically charge deposits of $150,000 or more, and assure residents that they can stay on the campus for the rest of their lives regardless of how their needs change, and that the deposits will be refundable to themselves or their heirs when they leave or die. But residents typically also have to pay monthly fees for care, and those fees can continue to increase. Assisted-living facilities like Sunrise generally require no deposits but charge a monthly pay-as-you-go-plan.) That's what happened to the 170 people who lived in Covenant at South Hills in Lebanon, Pa. Their deposits went up in smoke when their facility was sold in bankruptcy to Concordia Lutheran Ministries, which did not take on that liability. Several are now suing B'nai Brith Housing, the original operator of Covenant.