I recently visited with a long time client.  It was a sad visit, for more reasons than one.  Her sister, Abby, also a client, had passed away last month.  The surviving sister, we’ll call her Betsy, wanted some help and some answers.  That brings me to the other sad part of our visit.

 Both sisters had established revocable living trusts with me many years ago.  That’s the good part.  Betsy lived with Abby to take care of her in her later years.   Abby was so grateful for her sister’s help that she changed her trust beneficiaries so that Betsy would be the only one to inherit through the trust.

 Abby, on the recommendation of her investment advisor, sold her shares of stock when the market was plummeting in 2002.  That was a smart move.  She could have lost more of her nest egg, and she didn’t have time to make up her losses.

 The investment advisor helped Abby purchase a single premium fixed annuity with a reputable insurance company.  That proved to be a wise move.  She would lose no more of her principle. It was fully insured.

The investment advisor was informed that Abby had a revocable living trust and so he wisely named the trust as the “owner” of the annuity.  That was also a good move.

 But here’s where the bad news starts.  An annuity has three distinct parties.  One, the annuitant, or the person whose life expectancy is used to determine the value.  Two, the owner, the party who is listed as the one who actually holds the policy.  And Three, the beneficiaries.  The beneficiaries are those who will receive the funds accumulated in the annuity upon the death of the annuitant.

 As indicated, Abby was the annuitant.  Her trust was the owner.  But the beneficiaries were the original trust beneficiaries and those individuals would eventually receive the funds upon Abby’s death.

 That doesn’t sound too bad.  EXCEPT that later Abby wanted to change her beneficiaries and leave everything to her sister, Betsy.  You see, her original trust beneficiaries hadn’t kept in touch with Abby, hadn’t taken care of her, and were mostly out of her life.  So a change was in order.

 Abby then amended her revocable living trust to do just that.  Change her beneficiaries.  Her trust was listed as the owner of her annuity, so she assumed that the terms of the trust would control who would receive her assets.

 And it would have IF her investment advisor had just named the trust as the beneficiary of the annuity.  But he didn’t.  He named the original beneficiaries individually.  Guess what controls the distributions of the annuity proceeds?  Yes, it’s the form held by the insurance company which names the beneficiaries.

 If the investment advisor had simply named the trust as both the owner and the beneficiary, then everything would have turned out all right.  But he didn’t.  So instead of Abby taking care of her sister, as the sister had taken care of her, the entire $200,000.00 from the annuity will be distributed to the original beneficiaries of the trust and not to Betsy.

 The sad news in all this is that Betsy, after diligently looking after her sister, does not receive one dime of the annuity proceeds.  This is not what Abby wanted.  She wanted to express her thanks to Betsy for all her care, by leaving her the home, the bank accounts, and most of all, the annuity proceeds.

 This isn’t the first time something like this has happened.  That’s why I knew I’d better warn you to look over your documents.  Check your annuities and your beneficiaries.  See if you need to protect your estate like Abby had intended to.  

 I recommend that you name your trust as both the owner and the beneficiary of any annuity funds.  That way, when you decide to amend your trust and change your beneficiaries, you won’t have to remember to file a change of beneficiary form with your insurance company. There are slightly different rules for ownership of IRAs and 401Ks but again, you need to review all the beneficiary designations

Just this morning I visited with a long time client. It was a sad visit, for more reasons than one. Her sister, Abby, also a client, had passed away last month. The surviving sister, we’ll call her Betsy, wanted some help and some answers. That brings me to the other sad part of our visit.

Both sisters had established revocable living trusts with me many years ago. That’s the good part. Betsy lived with Abby to take care of her in her later years. Abby was so grateful for her sister’s help that she changed her trust beneficiaries so that Abby was now the only one to inherit through the trust.

Abby, on the recommendation of her investment advisor, sold her shares of stock when the market was plummeting in 2002. That was a smart move. She could have lost more of her nest egg, and she didn’t have time to make up her losses.

The investment advisor helped Abby purchase a single premium fixed annuity with a reputable insurance company. That proved to be a wise move. The investment advisor was informed that Abby had a revocable living trust, and so he wisely named the trust as the “owner” of the annuity. That was also a good move.

But here’s where the bad news starts. An annuity has three distinct parties. One, the annuitant, or the person whose life expectancy is used to determine the value. Two, the owner, the party who is listed as the one who actually holds the policy. And three, the beneficiaries. The beneficiaries are those who will receive the funds accumulated in the annuity upon the death of the annuitant.

As indicated, Abby was the annuitant. Her trust was the owner. But the beneficiaries were the original personal relatives who would eventually receive the funds upon her death.

That doesn’t sound too bad. EXCEPT that later Abby wanted to change her beneficiaries and leave everything to her sister, Betsy. You see, her original trust beneficiaries hadn’t kept in touch with Abby, hadn’t taken care of her, and were mostly out of her life. So a change was in order.

Abby then amended her revocable living trust to do just that. Change her beneficiaries. Her trust was listed as the owner of her annuity, so she assumed that the terms of the trust would control who would receive her largess.

And it would have if her investment advisor had just named the trust as the beneficiary of the annuity. But he didn’t. He named the original beneficiaries individually. Guess what controls the distributions of the annuity proceeds. Yes, it’s the form held by the insurance company which names the beneficiaries.

If the investment advisor had simply named the trust as both the owner and the beneficiary, then everything would have turned out all right. But he didn’t. So instead of Abby taking care of her sister, as the sister had taken care of her, all the money from the annuity will be distributed to the original beneficiaries of the trust and not to Betsy.

The sad news in all this, is that Betsy, after diligently looking after her sister, does not receive one dime of the annuity proceeds. This is not what Abby wanted. She wanted to express her thanks to Betsy for all her care, by leaving her the home, the bank accounts, and most of all, the annuity proceeds.

This isn’t the first time something like this has happened. That’s why I knew I’d better warn you to look over your documents. Check your annuities and your beneficiaries. See if you need to protect your estate like Abby had intended to.

I recommend that you name your trust as both the owner and the beneficiary of any annuity funds. That way, when you decide to amend your trust and change your beneficiaries, you won’t have to remember to file a change of beneficiary form with your insurance company.

Better yet, come see me for your annuity, insurance, and asset protection needs. I’ll make sure you get the right kind of policy, and the right kind of protection. And that your funds will always be consistent with your overall estate plan.

BEWARE OF THE INVISIBLE LINE IN THE BANK

You mean you didn’t know there was an invisible line in your bank? That’s because it is invisible after all. No one will dare to point it out to you. “Then why is this important at all,” you may ask. Because what you don’t know may come back to bite you.

I’ll give you an example. One day a client of mine, Mrs. Prudent (the name has been changed to protect the gullible), went into her bank to deposit a check. It was a check for a large sum of money.

Mrs. Prudent had sold her small, home-based business. She wanted to fully retire and take things easy. She was eighty-two. She intended to open a certificate of deposit.

A CD, she knew, is insured by the Federal Deposit Insurance Corporation up to $250,000. This was the amount of her deposit. She felt good, she knew her money would be safe.

That was when the teller told her she must see the investment advisor at the bank. He would help her with her deposit.

The investment advisor was very pleasant and cordial. He certainly looked and talked like he knew what was best. He said that the bank now had an account for her that would pay more that the existing rate for a jumbo CD. This account would also grow faster than her deposit could.

Mrs. Prudent was absorbed in the banker’s explanation. She felt like she was in good hands. It was her bank after all.

When all the soothing talk from the bank investment advisor was finished, Mrs. Prudent left her money in his hands. He gave her a paper that looked like an official investment document. It didn’t look quite like her previous CD’s. But she was comfortable. She had dealt with this bank for years.

What Mrs. Prudent didn’t realize was that she had crossed the invisible line in the bank.

You see, banks can now offer financial products which are in no way associated with the bank. They are now in the investment business. The banks investment officers get paid a little differently than the bank employees. They may make commissions on the sale of other investment products.

The transactions on one side of the invisible line in the bank are insured by
the Federal Deposit Insurance Corporation. They are bank products.

On the other side of that invisible line, the banks investment officers may place your money in investments, insurance, and annuities which aren’t the products of the bank at all.
These products are not insured by the Federal Deposit Insurance Corporation. They bear the risk of other types of investments. They may fluctuate with the stock market.

This is fine, if you know that’s what you are getting. But it does come as a surprise to many.

Some time later, Mrs. Prudent came to see me about updating her medical power of attorney. While she was talking with me, she mentioned that it seemed odd that her bank CD seemed to lose some of its value.

“What do you mean,” I asked.

She produced a copy of a statement which showed that the value of her “CD” was now less than the $100,000 she had originally deposited with the bank.

After a review of the statement, I explained that the “CD” was not a CD at all. It was a variable annuity issued by a large insurance company, and it was based on the performance of the stocks held within the annuity.

“What do you mean,” she asked. “I opened this account at my bank.”

“ Yes,” I explained, “but it was issued on the financial advisor’s side of the invisible line at the bank. It was not a bank product at all, much less a CD.”

The account had lost value because the stocks which were held in her variable annuity had lost value in the stock market.

“I don’t invest in the stock market,” she argued.

“Oh, but you do,” I responded. What you ended up with at the bank was not a CD. As I explained, it was a variable annuity.

A variable annuity is a product which varies (hence variable) according to the stocks held by the insurance product, the annuity. You were not dealing with the bank, you were dealing with the investment advisor who happened to be at the bank. You crossed the invisible line.

Mrs. Prudent was flustered. “This isn’t what I wanted,” she shrieked. “I just wanted my money to be safe and earn a fixed percent. I wanted a CD!”

I had to agree. Mrs. Prudent had no business investing in the stock market. Or in a variable annuity, which is nearly the same thing.

At her age there would not be enough time to recover any loss in the value of her investments. Safety had become more important than growth, or even the potential for growth.

If the annuity Mrs. Prudent had invested in were a fixed annuity then everything would be all right.

With a fixed annuity there is no threat of losing the principal. All principal is guaranteed. Some states have even passed laws securing the funds held in a fixed annuity. It is safe from lawsuits and creditors. So all in all, a fixed annuity is not a bad investment.

And a fixed annuity would most likely have paid more interest than the banks certificate of deposit. And it would have been as sure and protected as the banks certificate of deposit.

But that is not what the bank investment advisor wanted to sell her. You see a variable annuity generally pays a larger commission to the bank financial advisor than would a fixed annuity.

We went to the bank together. When I objected to the way Mrs. Prudent was sold a variable annuity when she wanted a CD, the bank disagreed.

When I explained that Mrs. Prudent was eighty-two and had no business being in the market, the bank disagreed.

When I asked if Mrs. Prudent’s funds could be returned and placed in a safe account, the bank said no. The bank generally refused Mrs. Prudent’s requests.

Their position was that Mrs. Prudent should have known about the invisible line in the bank, that is the difference between banking activities, and investment propositions.

The best notion it seems to me, is to let banks do your banking, and let investment advisors advise you about investments. Insurance representatives would be the ones to talk to about insurance. And annuity promoters would be most helpful when considering annuities.

In any event, see your estate planning attorney before completing any such changes. You would be wise to make sure whatever you do coincides with your estate plan. You don’t want to undo any of your careful planning. There is an invisible line.

Do you know where the invisible line is in your bank?

Newsflash! Don’t stuff your money under your mattress! There is a safer alternative. Everybody’s worried about their money right now. Some are resorting to crazy behavior, like pulling all of their money out of the banks and putting it under their mattresses. Ive been running into the same question lately. What is a safe investment in a troubled economy? read more >>

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