(New York)

Annuities have had a good 12 months and it is starting to seem like they are entering a golden age. Not only are the country’s demographics trending in favor of annuities, but the last year’s volatility and the recent rule change allowing annuities into 401(k)s are big tailwinds. Another big trend which helps is that since more and more companies are opting to offer 401(k) programs instead of DB plans, then people are ever more in need of guaranteed income. According to AIG, “It’s less about the vehicle. More plan sponsors and participants need to get comfortable with the creation of income … The only way to get guaranteed income is to annuitize retirement benefits. The question then is will annuities be offered in-plan or out-of-plan”.

FINSUM: The market and regulatory context are becoming better and better for utilizing annuities for clients. It might be time to think about these options if you aren’t already.

(New York)

Interest rates are still very low. So low that retirees are being starved of income. With that in mind, some are employing annuities in unique ways to help increase interest income. In particular, one strategy being employed for older investors who want to boost income in the “safety” portion of their portfolio is to use multi-year guaranteed annuities (MYGAs) to boost interest income. MYGAs typically pay well in excess of what CDs and other cash management products pay. This is because the insurer behind the annuity can invest the capital in a diversified portfolio, including longer-term holdings. MYGAs are not FDIC insured like CDs, but they do come with contractual guarantees and are often from companies with great credit ratings.

FINSUM: This is a very good strategy for certain investors who can afford to tie up capital in an annuity and are looking for ultra-safe but above-market interest income relative to similar instruments.

(Washington)

One of Biden’s most important campaign promises was that he would not raise taxes on the middle class, or more specifically those earning less than $400,000. Accordingly, it is a surprise to see a new proposal from Democrats that would do exactly that. Biden and the Democrats appear to be going after “stepped up basis” in inheritance taxes as a way to raise tax revenue and fund the infrastructure bill. Right now, when inherited assets get transferred, their basis resets to whatever the market value is at the time of inheritance. In this way, heirs only pay capital gains on the increase in value that occurs while they hold the asset. Biden and his administration wants to change the rules in order to keep the basis in place from when the original buyer purchased the asset. This change would not only affect the wealthy in a big way, but also the middle class, as the basis for many assets would suddenly be very low, meaning large taxes would be due no matter the size of the estate being transferred. A good example might be an inherited condo from a parent that was bought 30 years ago and has appreciated from $100,000 at purchase to $600,000 now. Under the current system, a middle class earner who inherited and decided to immediately sell the condo would pay almost no taxes. However, under the new proposal, almost $100,000 in taxes would be due because basis would be applied to the original purchase price!

FINSUM: This is a big change that advisors need to be watching closely!