Struggling with your electric bill? Get an energy assist from SDG&E and save. You may qualify for an 18% discount. Visit sdge.com/fera to find out more. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less.

Today, our asset protection planning series comes back from vacation. It's been hiding out down in the sunny climes of the Caribbean, sitting on the beach, laying low, waiting for all of the storms and investigations to pass. But now, it's time to come back and get back to work. So we begin today with part eight, called Annuity Values and Annuity Payments, Exemption Planning.

So for context, we're talking here about asset protection planning for mere mortals. And my goal in this show is to give you a lot of low-hanging fruit, some exposure to a number of strategies that are available to mortals. Not to somebody with $10 million, but to any person who's just simply building assets, accumulating capital, and thinking about how to protect that capital from the unique risks that you face.

And so I'm trying to make everything very accessible. And annuities are an important component of that. We've been talking about exemption planning for the last few shows. And of course, exemption planning involves assets that are specifically exempt from the claims of creditors based upon US federal or state law.

Apologies to my international listeners, but some of these concepts will come over. But you'll have to, of course, do the detailed research for your country, as well as listeners in each state. You have to research your own particular state. But we've talked about retirement account exemptions. We've talked about life insurance exemptions.

We've talked about homestead exemptions. And today we continue with annuity exemptions. Now annuities are interesting creatures. I really love annuities. Not everybody does. I always chuckle. Clark Howard, a well-known financial broadcaster, just done a great job. I really enjoy his work. But Clark Howard calls annuities a four-letter word in his show.

And I always chuckle when he says that. Because in a way, he's not wrong, but he's certainly not right. He's right about that statement in the same way that I'm right in making a statement like this. A dog is a totally worthless creature. I repeat, a dog is a totally worthless creature.

Now is your dog worthless? Well, of course, that depends a lot on the context. A dog really is worthless. Of course, if you went out and tried to sell your dog, you really wouldn't be able to sell your dog. So of course, it's worthless. Except that you say, but that's not why I have the dog.

I really love my dog. I like a lot of the things that I get from my dog. I get love. I get affection. I get plenty of licks around the head and shoulders. And so I like my dog. My dog is not worthless. It's an important part of my life.

Well, your dog isn't worthless, but yet it still is worthless. Except, you know, some dogs actually can be sold. So they're not worthless. But even if you have an expensive dog that's not worthless, because you could actually sell it for money, the owner might still call it worthless, because it's just not doing its job well.

So for example, you go out, buy an expensive guard dog, pay a lot of money for the training. You could sell it for a lot of money. Guard dogs are not cheap. But the guard dog prefers to cuddle up by the fireplace and is not too interested in ripping out an intruder's throat when you give it its attack commands.

So that worthless dog sits around for years and you just say, man, that worthless dog, I spent $15,000 on that thing and it is totally worthless. Until one day that dog jumps out of its bed and saves your daughter's life by protecting her from a kidnapping attempt. Now, of course, it was bleary eyed and stumbling around from a little too much sleep by the fire, but it still came through in time of need.

So your worthless dog turned out to be worth something after all to you. But because it won't attack on command, you can't sell it anymore because no one wants to pay top dollar for a bleary eyed guard dog that sits by the fire all day. So it's worthless after all.

Now, it's maddening, isn't it? A statement like that, dogs are worthless, is a maddening statement because there's so many different directions that you could go with it. I've just scratched the surface on all the permutations that I came up with on that particular statement I made up. So let's save our dissertation on the relative worthlessness of dogs for another day.

I just want you to think of that statement in the same way that you think of the statement annuities are a four letter word. It's expressing a truth. A statement like that is expressing a truth that's important for you to understand, but it's not a true statement. It's obviously not objectively explicitly true because annuities has 11 letters in it.

One, two, three, four, five, six, seven, eight, nine letters, not four letters. So it's obviously not true. And it's not true that they're a four letter word in the metaphorical sense, but yet it is. And this is the problem with annuities. So let's start back to the beginning to add a little context so that you can figure out whether your annuities might be worthless or extremely valuable.

What is an annuity? Well, you can think about an annuity in multiple ways. You can think about an annuity in terms of a pot of money and or a stream of payments. Usually when talking about annuities, we define an annuity as a stream of payments, a stream of payments that comes into somebody and it often comes in for something approaching life expectancy.

In many ways, we talk about annuities as the opposite of life insurance. When you buy a life insurance policy, you make premium payments into that policy until the moment of death and then when the death claim is filed, that life insurance policy pays out a large lump sum of money to the stated beneficiary.

So that's life insurance. Now annuity is the opposite because you can take a large sum of money and you can give it to an insurance company and they can make out a series of payments that come in each month until the moment of death at which time the payments stop.

So one useful way of thinking about annuities is as a way of disposing of a large amount of money over the course of somebody's lifetime. But of course there are many types of annuities. There are immediate annuities and there are deferred annuities. There are annuities that come in for a fixed term.

There are annuities that come in for a lifetime. There are annuities that come in for a lifetime and or a fixed term. There are annuities that come in for, that are calculated based upon fixed interest rates that are guaranteed by an insurance company. There are annuities that are based upon variable rates.

And I don't want to go into a whole discourse on all the different types of product versions, but I want you to think about this in terms of concept. So back to corpus or stream of payments. With specific regard to asset protection planning, annuities that are a sum of money are valuable and also annuities that are a stream of payments can be valuable.

Both of these can be valuable. You can take a million dollars and you can go to the commercial annuity marketplace and you can say to a commercial insurance company, here is a million dollars. You can deposit that million dollars into an annuity contract. It's an insurance contract. You can deposit the million dollars into the annuity contract.

That annuity contract can sit there and then five years, 10 years from now, you can go back to that contract and you can take out your million dollars plus interest and do whatever you want with it and yet have it inside that annuity contract. That is one way of thinking about an annuity.

I think of that as the corpus, the body of money that's just sitting there. And sometimes you don't have to decide in advance what happens with the money. You can just simply put the money into an annuity contract. Now on the flip side, you can think about an annuity in terms of a series of payments, a stream of payments.

You can take that same million dollars to an insurance company. You can say, here insurance company, make payments to me for the rest of my life. And they'll say, okay, well based upon your life expectancy, we'll make payments to you of $800 every month for the rest of your life.

That's also an annuity. But in that case, once you have that series of payments, you no longer have access to the million dollars. You have now the series of payments. It's important to point out, however, that both of these are valuable. It's valuable to have a body of money, a corpus of money.

It's also valuable to have a stream of payments. Now when you think about your net worth, you usually think in terms of the body of money. And so you usually think in terms of that value, that corpus of money. But is that really the most important thing? Or are annuity payments more important?

Ask a question. Who's richer? A 30 year old with a million dollars in the bank and no income, or a 30 year old with no assets, but a guaranteed $100,000 a year income for the rest of his life? Which 30 year old is richer? I repeat, a 30 year old with a million dollars in the bank and no income, or a 30 year old with no assets, no money in the bank, but a guaranteed income of $100,000 a year for the rest of his life?

Which is richer? I should probably adjust those numbers a little bit because a 30 year old couldn't buy a million dollar with a million dollars, couldn't buy $100,000 a year. So let's just say it's $60,000 a year. Which is richer? You get the point. The point is that you can't answer the question because sometimes the body of money is valuable and sometimes the stream of income is valuable.

Now here's why that's so important. When we come to asset protection planning, both of these strategies can be appropriate ways of protecting money. For example, if you have a million dollars in a bank account and you move that million dollars into an annuity contract, and if annuity contracts are exempt from the claims of creditors in your particular state, you have effectively protected the million dollars.

And that can be very helpful in your overall asset protection scheme. Sometimes however, you can't do that. But you can take a million dollars out of your bank account and you can purchase a stream of payments that comes in for the rest of your life. And those payments can either be legally protected from the claims of creditors or simply functionally protected from the claims of creditors.

If you're trying to convert a non-protected asset into a protected asset, you can do that with an annuity. If you're facing problems, you can take a million dollars from your bank account. You can go to a commercial insurance company and you can say, "Here's a million dollars. I want you to pay me a stream of annuity payments beginning 20 years from now." You can make that an irrevocable contract where they'll start 20 years from now.

Well now practically, what is a creditor going to come after? Are they going to sit around and wait for 20 years for this stream of payments that they can then legally come after? That would be a very rare creditor indeed. And so annuities can be very useful in many ways in asset protection planning.

You have to study the laws of your state. You have to look at the laws of the specific situation. This is very detailed planning where specific legal knowledge needs to be applied. But conceptually, annuities can provide for a lot of benefits. Why did I go into so much about the corpus and the payments?

Well some states protect the corpus. Some states protect the stream of payments. So we'll talk more about that in just a moment. Now here are a couple of points. You already own an annuity. You're already contributing to an annuity if you are a US person. That annuity is called Social Security.

Now Social Security is a unique asset because it is exempt from the claims of creditors when you receive the income. It's also exempt from bankruptcy court. Any listener of the show for two or three episodes would know I'm not a fan of the Social Security program for many reasons.

But it can be a useful form of asset protection. One thing that might hopefully make you feel a little bit better about throwing all your money into the Social Security program is that at the very least, those payments that you're making are going to be protected from the claims of your creditors.

If you're making a contribution each month through your payroll deferrals or your self-employment taxes that you're contributing, if you're making a contribution to the Social Security administration, and then in retirement you take that in distribution out, those income streams, the assets that you are accumulating in the Social Security system are protected from the claims of creditors.

There are other kinds of annuities that also function like this. So for example, you might be enrolled in a defined benefit pension program, some system where when you retire you receive a certain amount of money. You receive a retirement stream for the rest of your life of a specific amount, a specific dollar amount or a specific dollar amount that's calculated based upon a formula.

That asset is protected from the claims of creditors, primarily because it's a retirement program and it falls in under those retirement exemptions, but functionally it's an annuity. That's what it is. So you could have a 401k account, which is a sum of money that is protected from the claims of creditors, but what we're talking about is a stream of payments in the form of a pension program that is protected from creditors.

Now annuities have their exceptions. For example, commercial annuities are not protected against the IRS making a charge against you. They're not protected from criminal judgments, just like most of those other assets. So if you're up against the IRS, your million dollar commercial annuity is not going to protect you, but they are protected from many different, more everyday creditors.

They are protected. Or I should modify that to say they often are protected. You need to check on the specific rules of your states. I'm going to give a couple of state examples in a moment. I could go over so many states, but it just would be maddening to go through the 50 United States and talk about what's protected and what's not protected.

And there is a wide range. Florida, of course, being where I have the most familiarity of having done financial planning on the ground, Florida protects annuity values the same as life insurance cash values, which means that Florida protects 100% of the value of annuities. That's protected 100%. So if you had a lot of money in Florida, you have lots of tools available to you.

You can buy a house that is protected from homestead exemptions. You can purchase life insurance and accumulate cash values. You can put your money inside of annuity contract. You can fund your IRAs. And then we'll talk in the next episode on college exemptions. You can fund things like five to nine accounts, and those will all be protected from the claims or creditors.

Now, there are other interesting states, states where things are not protected at all. For example, if we go to the state of Massachusetts, Massachusetts doesn't protect annuity cash values, and it does not protect annuity payments. So Massachusetts, annuities would not be useful to you. Now, there are some states which are a mixture of these things.

For example, some states protect the values, and some states protect a monthly payment. We went to Delaware, Massachusetts' neighbor. $350 per month in annuity payments is protected, plus an amount needed for reasonable requirements of the debtor and dependents. That's different than a huge amount, and many states have a specific stated sum.

We could go throughout all the states. Now, there are some states which are interesting in the difference between annuities and life insurance or annuities and IRAs. For example, the state of Georgia does not protect life insurance cash values beyond about $2,000 from the claims or creditors. But in the state of Georgia, annuities are protected, based upon my understanding of the state law.

Consult with an attorney in the state of Georgia who would be an expert on that. So you can look at your state and try to figure out how to put these tools together. So let me give you just some basic planning ideas. In annuities, think about protecting a sum of money just through simple exemption planning.

If your state, the laws of your state, protect annuity values from the claims or creditors, consider purchasing an annuity to shelter the money that would otherwise be exposed to the claims or creditors. Now, if you do this, you will have to consider a few things. First, you'll have to consider the investments that will be represented by the annuity.

You'll also have to consider the costs that will be incurred by the annuity. Let's start with investments. Functionally, annuities fall into two different categories, what are called fixed annuities and what are called variable annuities. A fixed annuity is like a contract, is a contract with an insurance company, like you can sometimes purchase an investment contract with a bank.

In a fixed annuity, an insurance company guarantees a stated rate of return on the money. They guarantee that return and it's backed up by the full faith and credit of the insurance company. Think of this like a CD from a bank. If you purchase the annuity, you'll get this particular interest rate.

Now those interest rates will vary depending on the interest rate environment. In a low interest rate environment, they will of course be fairly low, but they do have a high degree of safety, of certainty. Yes, you're going to get a low return compared to a riskier investment, but you're going to get certainty.

And that may be useful for you, especially if you were entering into a period of time at which you thought you might need to make sure that a certain amount of money is protected. We will deal very lightly in this show with the Fraudulent Transfers Act. Annuities are interesting in that they are generally not a transfer without value, but as in anything, the best time to do asset protection planning is before you need it, before a claim arises.

What I mean when I say before thinking about something like this, let's say that you had a good amount of money and you were getting ready to start a business enterprise that might expose you to a higher amount of liability, or you were getting ready to make some particular move in your personal life that might expose you to some kind of liability.

Well, it might be wise for you to look and say, "Where can I stash the money?" So that if some circumstances that give rise to a claim occur two or three years from now, I would be protected and my money would be protected. Annuities can do that. And you can purchase an annuity contract, a fixed annuity contract, and it's functionally similar to purchasing a CD.

You can purchase the contract, you can keep the annuity for 10 years, 5 years, whatever, and you'll get a fixed rate of return on that contract. Now the difference between a fixed contract and a variable contract has to do with the investment. In a fixed contract, the insurance company will be taking your money and investing that with their general portfolio of investments, paying you your interest rate based upon their earnings from that portfolio, and they're guaranteeing it.

Different annuity contracts might have some flexibility. For example, you might buy a fixed contract, which has a certain rate that's guaranteed for a certain time, but that rate can adjust. There are all kinds of options available. Now that's different than a variable contract. A variable contract works like a variable life insurance policy where you're purchasing what are called subaccounts in the language of insurance companies.

A subaccount is functionally a separate investment account. Usually it's just simply a mutual fund. Usually it's a mainstream mutual fund that has been slightly reorganized to be a subaccount for an annuity portfolio, and you're purchasing credits in that subaccount. What that means is you can go and you can purchase your mutual fund that's invested in the stock market, and your annuity in that case will receive the same rate of return that the mutual fund holders own.

So you'll be exposed to the potential for profit from the market, or you'll also be exposed to the potential of loss of value due to declines in the market. So you can purchase a variable annuity and be exposed to market risk with a potential for market upside. Now at the very high end, if you have enough money, you can purchase a private annuity, an annuity issued by a commercial insurance company where even your account is individually managed.

So it is possible, if you have enough money, to have an investment manager individually managing your personal $5 million portfolio, but that's being managed inside of an annuity contract. Pretty high end, it's possible. We talked about fixed versus variable annuities. You could see how, if you're trying to invest money, an annuity can bring you useful protection because of the creditor protection.

If you're going to own mutual funds that are just simply open-end mutual funds, you can just simply probably own those same mutual funds inside of an annuity. And you move those mutual funds from an unprotected class to a protected class. So in your investment options, think carefully. And if you want to own something with those investment characteristics, look at annuity contracts, shop the market, see what's available.

Now the other thing that you want to ask questions about is what about the expenses in an annuity? Because any investment will feature some expenses. Your very cheapest way for you to invest in something like a company is for you to go to the company, purchase shares of stock directly, and hold those shares of stock yourself with individual registration with that company.

You'll have no investment management fees, you'll get the full dividend, you'll have the cheapest option. But any layer of investment management that you put on top of that is going to feature some amount of expense. Those expenses range from very small, for example if you're purchasing index funds from the large low-cost providers, they'll allow you to hold large numbers of investments at a very low expense, to very high.

If you're paying an individual investment advisor a percentage of money to manage and purchase individual stocks in your portfolio, then your expenses are going to be relatively high. And with annuities you have two sets of expenses that you have to pay attention to. Now in a fixed annuity contract, the expenses are basically non-existent in the sense that they're already calculated and taken out before your investments are guaranteed to you.

So in a fixed annuity contract, it's not that there are no expenses, but those expenses are largely blind to you because they're dealt with prior to the guarantees that are made to you. But with a variable annuity contract, that is not the case. With a variable annuity contract, you need to look at the investment expenses as well as what's called the mortality and expense charge.

Investment expenses are relatively straightforward. Investment expenses are simply the money that's paid to the investment managers of the investment. So if you're purchasing a variable annuity that has sub-accounts that are made up of mainstream mutual funds, you're paying the mutual fund manager, the mutual fund management company, the same fees that are going to be paid if you were purchasing that mutual fund on the open market with an open-end mutual fund account.

And you weren't simply paying them within the context of an annuity count. So if you're with the BlackRock XYZ fund or the Vanguard ABC fund or whatever, the same investment expenses that you would pay if you owned that mutual fund separately are going to be paid if you have that as a mutual fund sub-account, as a variable annuity sub-account.

So here, your expenses will range from very low to very high. And you have to do the same investment analysis that you do with a mutual fund to see whether those mutual fund expenses are in your best interest. You can purchase low-cost investments in an annuity just like you can purchase low-cost investments in a mutual fund.

And in general, you should always look for low-cost investments because one of the most reliable predictors of investment performance is low expenses and low costs. But in an annuity, that's only one component of the costs. It's only one component. The other component you have to look at is what's called the mortality and expense charge.

The mortality charge is the insurance company's assessment of the cost of providing you with insurance that's related to your life expectancy. The expense charge is the insurance company's charge of the expenses necessary for them to manage the investment contract. Together, these mortality and expense charges can be low, they can be moderate, or they can be high.

Depending on the specific choices that you make. In most annuity contracts, you will have a number of choices. For example, you will usually have a choice of what kind of death benefit you would like to purchase. Let me use a very simplified example. You could purchase a death benefit that guarantees that any amount of money that you invest into an annuity contract will be paid out to your beneficiaries no matter the value of the contract at the date of your death.

If you invest $100,000 into an annuity contract, go forward eight years, your investment contract has declined in value to $50,000 due to bad performance in the stock market, and then you die, the insurance company would pay out $100,000 to your beneficiaries. That's basically a form of life insurance, and that's calculated by the insurance company in terms of their overall risk and included in the mortality and expense charge.

Now, usually you can purchase some form of enhanced death benefit. There are simple forms of enhanced death benefits that are available with annuities, such as a ratcheting death benefit. You invest $100,000 in an annuity contract each year on the policy anniversary. If the portfolio value is higher than $100,000, then that becomes your new death benefit.

If it's lower than the previous ratcheted death benefit, it gets ignored. So the policy values increase, fast forward five years, your policy values have increased to $150,000 because of good investment performance. Then you have three years of decline, so the actual account value of the annuity has declined from $150,000 to $100,000 back.

And then you die, well your beneficiaries will receive the $150,000 instead of the $100,000 account value. These are some of the benefits of annuities that are not available with things like open and mutual funds, and they involve this form of life insurance. But that comes with a cost, it comes with an expense that's associated with it.

If a company is offering a difference between a standard death benefit and an enhanced death benefit, they're going to also list for you the specific charge that you'll face for that annuity contract. This can be an extremely valuable form of a financial planning tool. For example, if I have a client that does not have the health necessary to be able to purchase life insurance in the open market, one of the tools to try to make sure that their family is going to be protected is a tool like an annuity death benefit.

Because when you purchase an annuity, that particular form of life insurance is not medically underwritten. So I could have a client where I said, "Hey, let's take this $100,000, it's in open and mutual funds, let's put it into an annuity contract." You can't qualify for life insurance, but if we invest the money aggressively and we choose a ratcheting enhanced death benefit, then that money will be either it'll grow a lot and you'll have the money to spend, or if it goes down, at least it'll be available as an enhanced death benefit because there's a good chance that you're going to die early and that'll help your family to have a little bit more money.

But you would have to assess if that's worth it to you, a feature like that. Now there are other features as well that you can purchase in an annuity contract. I've seen annuity contracts that have guaranteed increases in the death benefit. This was very popular about 10 years ago.

I haven't looked or analyzed the annuity market contract in the last few years, but this used to be very, very popular where there was a death benefit amount that would grow by a guaranteed amount. And that can have its place. It also can be very expensive. So it's tough to know whether it's worth it to you and a lot of individual consideration is important.

Back to my dog example, should you buy a $15,000 dog? Well, that depends. Should you buy an annuity? Well, that depends. And you'll have to go through a careful analysis of the risks, the benefits, and the costs. I don't want to go any deeper other than to simply say you can purchase high quality commercial annuities that give you good investments with low expenses.

You can purchase those and use them to protect money. And if you use them, you can also purchase them and own them in a low cost way and you don't have to be committed forever. You can take several hundred thousand dollars, you can purchase a commercial variable annuity from a low cost provider that has modest mortality and expense charges, and you choose investment sub-accounts that are modestly priced, and you can have a good investment, which brings me to now sales charges and taxes.

So the other thing you have to be careful of with the purchase of an annuity is the sales commission that is charged. Those sales commissions, most annuities have a sales commission because they're sold by an insurance agent. I think there are companies out there that will sell annuity contracts that don't have commissions, but I have not ever worked with those companies, so you'll have to research that yourself.

But most annuity contracts will have sales commissions. Those commissions will usually, can either be paid on what's called a front-end commission or a back-end commission, back to our different shares of mutual funds. In a world of no-load or no-commission mutual funds, most people have forgotten about A-shares, B-shares, C-shares, etc.

But functionally, with variable annuities, you can either purchase a sales commission up front, where you have a lower expense that's deducted from the contract in exchange for a specific commission that comes out of the money up front, or you can pay what's called a back-end sales commission, where you don't see any money deducted from your account up front, but you pay a higher mortality and expense charge for a period of time.

That period of time with some companies is a specific period of time, such as six years, eight years, a period of time for other companies is forever. But the way it works, if you're paying an up-front sales commission, you take your $100,000 to the insurance company, they deposit it, and you're charged a 3% sales commission up front.

So your account value only shows you $97,000 to begin with. But your mortality and expense charge may be 1.8% instead of 3.2%. On the other side, you could take your $100,000 to the insurance company, you could invest your $100,000, and all $100,000 would flow right to the contract, but you'll be charged a higher expense ratio, a 2.6% for the first eight years, and then it'll change down, something like that.

And what's better or worse would depend largely on what you thought the investments were going to happen, and it'd also depend on what was going to happen with your overall plans for the contract. If you choose a contract where the sales commission is not charged up front, then you're going to incur a series of surrender fees, where if you surrender the contract within a short amount of time, a surrender charge will be charged to the contract.

Those charges range from reasonable to unreasonable, to egregious. And there'll usually be a sliding scale. With some companies it might be 6, 7, 5, 4, 3, 2, 1. With some companies it might be 10%, 10%, 5%, 5%, 0. You get the idea. You have to look at the actual contract, but all of that is spelled out very specifically.

The point is, if you hold an annuity for an extended period of time, then you can keep that annuity and take it back, and you won't pay any expenses on the contract, other than what you paid each year with your management charges. The reason I'm going into this is because of asset protection planning.

If you're trying to protect a lump sum of money, you have a million dollars, you're getting ready to start a business that you think might expose you to risk, you could easily move that million dollars into an annuity contract. And then, fast forward six years, you close that business, eight years, whatever, you could take the money back out of the annuity contract if you no longer want the annuity.

That's important to know. So that's why I'm going into this with such detail, so that you can understand, hey, I can choose something. I can choose money that's safe, I can choose a fixed annuity, I could choose money that's more aggressively invested, I can choose to expose myself to the potential of surrender charges or not surrender charges, and meanwhile, if the laws of my state protect it, this annuity can be very valuable to me to protect a lump sum of money.

Which leads me now to the final thing, which is taxes. One of the important things to know with annuities, if you're purchasing annuities, there is a unique system of taxation that's applied to them. Functionally, it's similar in some ways to the system of taxation that's applied to retirement accounts.

The money that grows within an annuity contract is not taxed as it grows. When you purchase an annuity, unless you're purchasing an annuity inside of a retirement account, which we'll talk about in a moment, the purchase of that annuity is always made with after-tax dollars, money that you've earned and already paid taxes on.

But the inside buildup of values inside the annuity is not taxed, which means you can get a helpful tax deferral on the contract. That's very, very useful. Now when you take the money out of the annuity, the profit on the annuity will be taxed. I repeat, when you take the money out of the annuity, the profit will be taxed.

If you take it out after, what is it, 59 and a half, I guess, also, then it's taxed like an IRA. It's just taxed to you as income. If you take the money out prior to that age, 59 and a half, then you will be paid tax. If you take the profits out of the annuity, then you'll pay an additional 10% penalty tax, like an IRA tax can be.

Annuity taxation is important for you to think about. One benefit to annuities is they can be rolled over from annuity to annuity without incurring taxation. If you've taken a lump sum of money, you've invested it into an annuity contract, then 10 years from now you decide you want a different annuity contract, you can do a 1030, I always get it messed up, either 1035 or 1031 exchange.

One of those is for like-kind real property and one of those is for annuity and insurance contracts. You can do a 1031 exchange, I think, from one annuity into another annuity contract. You can also do a 1031 exchange from an annuity, I got to make sure I get this right.

I was wrong, it's 1035, sorry. One of those details that has bedeviled my mind for the last 10 years that I've been a financial planner is I always get confused which is real property and which is with insurance contracts. A 1035 exchange is an exchange of annuities, life insurance contracts, and long-term care contracts.

A 1031 exchange is for real property usually used for real estate to avoid taxation on real estate. So, with an annuity, you can do a 1035 exchange from an annuity contract into another annuity contract without incurring taxation. You can also do an exchange from a life insurance contract into an annuity contract and there are a couple different permutations of going between life and long-term care annuity, etc.

But 1035 exchanges can be very useful because as those values grow in annuity, you can exchange them from one annuity to another annuity if there's an annuity that better fits your circumstances and better fits your situations. You should know that. However, if you don't keep an annuity and if you surrender an annuity before 59.5, you will pay ordinary income taxes on the gain plus, if it's before 59.5, a 10% penalty tax.

If it's after 59.5, you'll just pay ordinary income taxes. Those taxes are assessed if it's a lump sum, they'll be assessed as a lump sum. If you're receiving a series of annuity payments, you'll pay taxes based upon an exclusion ratio, which represents the amount of the annuity contract that was your contribution versus an amount that was your taxable profit.

Notice the words that I said a moment ago in this long stream of tax words, which was ordinary income. One of the disadvantages of purchasing annuities is the growth on an annuity is ordinary income, which is usually the highest taxed category for most people. This means that although you could purchase variable subaccounts that have investments in them, that's useful, but what you don't get is you don't get the treatment of those accounts as long-term capital gains, which are usually, at least in the current US tax code, a lower tax rate.

You need to do a tax analysis when purchasing an annuity as well. That covers basically taking money, putting it into annuity for the purpose of protecting that money. It is a valuable, useful strategy. It's also not quite as simple as some of the other strategies we have discussed, but it is a valuable, useful strategy.

You can take money that is exposed to the claims of creditors because you are holding it in just open investment accounts and open bank accounts, and you can purchase an annuity that is suited to your investment objectives, and that annuity value can be protected from the claims of your creditors.

Additionally, you can take an annuity and you can protect a sum of money by simply turning it into either a present or a future income. I repeat, first long series of planning that took the last 35 minutes to cover, which is to be taking an annuity and putting it into a contract, keeping it as a body of money altogether.

Now, I'm saying you could take a sum of money and you can protect it by turning it into an income, either a current income or a future income. That can be an extremely useful thing. Again, consider you're heading into a potential situation where you think in the coming years you'll face increased liability risks.

You have a sum of money right now, $100,000, $1 million, whatever. You have a sum of money and you say, "You know what? I'd like to protect this sum of money. I don't think I'm going to need this sum of money now, but what I'll do is I'll go ahead and I will turn this sum of money into a future income stream." You go and you purchase an insurance contract.

That income stream can come in right away or it can come in in the future. You can use that money to purchase an annuity that creates the income stream that's there for you. Now, here's what's cool about that. Sometimes that income stream will actually be completely protected from the claims of creditors because it is an annuity stream.

Sometimes you just get a functional protection of that stream of income because the creditor wants a lump sum now. They don't want a stream of income, especially if you purchase a deferred annuity. You're 40 years old. You set up an annuity that's going to pay you an income stream at 65 years old.

You're sued when you're 43. That creditor is going to want to sit around and wait 22 years to receive this stream of payments from the insurance company. You can set up the annuity in such a way that's just not available to them. This can be really valuable because you still are going to have a death benefit on that contract.

If you die before you can collect the money at 65, no problem. It's just part of your estate and you can direct the beneficiary of that. But if you live, you'll just receive it as retirement income. That can be very, very useful and it can be very useful to help a creditor to settle for less.

When you put this together with other asset protection planning techniques, you have some liability insurance that uses to give them a small settlement and you use the power of the fact that, hey, all your assets are locked up, they're unavailable, then you can get a smaller settlement. You can settle with them, clear your judgment creditors and be on with your life.

Annuities can be useful just simply by turning them into a future income stream. Don't let the simplicity of that concept make you think it's not useful. It can be useful. All depends on what your needs are for a sum of money, what your intended purposes are, etc. Next, annuities can be useful by helping you to protect money that is otherwise exposed to the claims of creditors.

One of the biggest examples here would be money that's in a retirement account. There are some states that explicitly protect the money that's in a retirement account from the claims of creditors. We talked about that in the retirement exemption program. There are some states, however, that do not protect the money that's in a retirement account from the claims of creditors, but that do protect the money that is in an annuity contract.

The most important of these states that I've looked into is Georgia. Georgia does not protect money that's in an IRA, but they do protect money that is in annuity. So if you have money in a Georgia IRA, you should seriously consider using an annuity contract inside of that IRA instead of just simply mutual funds if you are concerned about creditor protection.

There aren't many other states that I'm aware of that are that way, and you would need to ask a Georgia asset protection attorney. Perhaps they'll know problems with that plan that I don't know, but I think that that strategy could work perfectly well. There are other states such as Wyoming.

Wyoming doesn't protect IRA values, but they do protect annuity payments. So I think that could work in a state like Wyoming as well. But the idea here is you can fund in an IRA, you have certain investments that you can put in there and certain investments that you can't.

So when it comes to asset protection, you can't put a life insurance contract in an IRA. That's a prohibited investment. But you can put an annuity contract inside of an IRA. Usually you will hear the advice that you should never fund an IRA with an annuity. It's one of the ones that amateur financial advisors are most confident in.

Never fund an IRA with an annuity contract. And the reasoning is that you don't get any tax benefits from the annuity. That is absolutely true. You don't get any additional tax deferral or additional tax benefits with an annuity contract that you wouldn't otherwise get with having money inside of an IRA or a Roth IRA.

You don't get any additional tax benefits. The taxation of the IRA supersedes the tax deferral of the annuity. And so you're getting additional costs and expenses of the annuity, is usually how the logic goes, additional costs and expenses of the annuity that are unnecessary. Just purchase mutual funds. However, there are exceptions to that.

And here are just the meaningful exceptions. First, the exception can be with regard to asset protection, as I'm describing. If you have the protection of an annuity inside of an IRA, then now you have to confront that insurance law in addition to the IRA. And that could be a useful way of your protecting a large sum of money that you've accumulated in an IRA just simply by putting it into an annuity contract.

Second thing would be benefits of the annuity, such as lifetime income that are useful to you, and/or benefits such as those death benefits, enhanced death benefits, things like that. And there are financial planning circumstances in which those things could be useful. So no problem with the general advice. Don't generally put annuities inside of IRAs.

I think that's good general advice. Totally fine. It's not good in all circumstances. And that's an example of why it's not good. Next, one of the most useful things of annuities is they are a contract, and they allow you to get money out of your probate estate and allow money to pass via beneficiaries.

And this can help you to protect the claims, can help you protect you against the claims of creditors that would otherwise be assessed upon your estate. Now here I'm specifically talking about your estate, which means you will die. Some people, some types of asset protection planning are important when we come into planning while you're alive.

How do you keep control of your money? But remember, if you die and you owe money to people, your creditors will file a claim against your estate, and your estate has to stand good for the claims of your creditors. How does this work? Well, when you die, some of your assets will be included in what's called your probate estate, the assets that will pass through the probate court, and some of your assets will pass outside of your probate estate.

They pass simply via beneficiary designations. The most important one here is to compare something like a life insurance contract to money that's in your bank account. If you have $100,000 in your bank account, and you die, and you owe your creditors $100,000, your creditors will file their claims against your estate, and the executive of your estate will pay your creditors their claims.

And so therefore, the beneficiaries of your estate by will will not receive any money, because if you only had $100,000 in your bank account, and you willed that money to your brother or your children, whatever, they won't receive any money because the creditors come ahead of the beneficiaries. The beneficiaries have no claim.

Now, differently, if you had $0 in your bank account, you owe $100,000, but you also own a life insurance contract with a beneficiary designation on it. Now, a life insurance contract is worth $100,000. When you die, the life insurance company will pay the beneficiary of your contract $100,000. Your creditors will file their claims against your estate.

The executor will simply say to those creditors, "The estate has no money. We have no money to pay you with, and so therefore, your creditors will be unpaid, and the beneficiaries of your life insurance contract will still receive their money." The beneficiaries of a life insurance contract do not owe your debts.

They do not owe your... They didn't borrow the money. They don't owe the money. And so they have no connection with your estate. They're simply the beneficiaries of your life insurance contract, which is not part of your probate estate. That can be useful. It can be useful because similar things happen with annuity contracts.

An annuity contract is an insurance contract that has a beneficiary designation, which means that the annuity will pass outside of your probate estate. If you own $100,000 in an annuity contract and then you die, your executor does not have any function, cannot do anything with that annuity contract. It's not part of your probate estate.

It doesn't get submitted to the probate court. It passes outside of your probate estate. Don't mix up your tax planning here with this discussion. The life insurance, the value of the contract, and the annuity contract is still part of your taxable estate with regard to settling your debts with the IRS.

It's still part of your taxable estate. But with a $10 million estate tax exemption for an individual now, there's really very few people who are going to face that situation. I'm just talking about normal, ordinary claims of creditors against your estate. This can be very useful as part of retirement planning for people, especially people who are concerned about the risk of long-term care expenses, especially when we talk about Medicaid planning, which we'll talk briefly.

That's next. I'm going to briefly mention Medicaid planning. But annuities can provide a useful tool for you because they can allow you to establish an account where your assets will pass via beneficiary designation outside of your probate estate. You cannot accomplish that with money in a bank account. You cannot accomplish that with individually owned mutual funds.

You can accomplish that with annuities. I hope your brain can think of the situations and the financial planning examples in which that would be a useful feature of an annuity. Now let's talk about Medicaid planning. Annuities can provide an interesting way to impoverish yourself or your estate specifically and especially with things like Medicaid planning.

So Medicaid planning, if you're unfamiliar with this particular idea, Medicaid is a way of paying for health expenses for the indigent, people that don't have money. It's also a way of paying, Medicaid does have long-term care expenses that can be paid. So Medicaid will pay for nursing home care for somebody who doesn't have money.

And of course, one of the biggest risks that retirees face is how do I pay for the potential expense of a nursing home in my particular circumstance? If I don't have, nursing homes can be very expensive and how do we afford that? But the only way that you get any kind of government payment for nursing homes in the United States is through Medicaid and to be eligible for Medicaid, you have to be basically broke and bankrupt.

You can't have any money and there are very stringent rules on Medicaid as far as how many resources you can have and just a couple of thousand dollars. If somebody applies for Medicaid, they can't have more than about $2,000. So that's a big, big deal. So what do you do?

How do you provide for this? Well, annuities provide a useful tool for people who are planning for Medicaid expenses because they can be set up and allow you to take a sum of money and pay it to the community spouse. How does this work? Okay. Most states, again, require a Medicaid applicant to have no more than $2,000 to their name.

But the states consider the total assets of both the spouse, both the person that needs Medicaid and also what's called the community spouse. If I'm married and I need Medicaid and my wife is alive and living with me, she's the community spouse. And so because the property of husband and wife is considered to be the property of each person fully, then Medicaid says, "Well, listen, all of my wife's assets should go to pay for my long-term care expenses." But what do we do in that circumstance?

If my wife spends all of our money paying for my long-term care expenses and then I die, she's fully impoverished and now she has no money. So what is she going to live on at this point in time? So an annuity is one of the standard ways that you can solve for this because although the resources owned by either spouse are taken into consideration, and the community spouse does have a specific allowance of what they're actually allowed to keep.

It's called the community spouse resource allowance, which is half of all the couple's countable resources, not exceeding a certain limit. It comes out to about $123,000 according to the federal law, and each state can have a lower limit. Some states are very, very low. But if a couple has too many resources to qualify for Medicaid, then the Medicare rules require the money actually be spent before the applicant qualifies for Medicaid.

It's called spending down the assets. So Medicaid doesn't care what the money is spent on. They just have to be spent down and the money has to be spent down. So you can pay for your housing, your medical bills, the long-term care expenses, whatever. But when the money is gone, then Medicaid will step in.

However, income for the community spouse is not counted in the Medicaid rules. Income is counted to only if it's received by the Medicaid applicant. And so that's a really important thing. The community spouse's income is exempted from the Medicaid formulas. And so you can use an annuity as a way to deplete an asset.

Because if you take an amount of money and you purchase an annuity with it, and that annuity stream of payments goes to the community spouse, and the community spouse's income is not counted towards Medicaid eligibility, then basically that asset disappears from the Medicaid planning circumstance. It doesn't cause someone to be ineligible for Medicaid, which means that the assets don't have to be spent down on other things, and those assets are now available to the community spouse for -- that stream of income is available to support the community spouse.

Now there are some detailed rules that need to be followed on that. The annuity payments have to be completed before the end of the community spouse's life expectancy. So it can't be purchased as a gift to heirs. It has to come in for the life expectancy of the community spouse based upon the Social Security life expectancy tables.

It has to be a single premium immediate annuity. It has to pay out in a series of substantially equal payments. It can't be irrevocable. It must be non-assignable, non-transferable. And the Medicaid agency has to be designated as the primary beneficiary of the annuity after the death of the community spouse.

So that way if there are any unpaid funds that were expected to go to the community spouse, then they actually go to the Medicaid agency. But this is an example of how annuities can provide an interesting way of basically impoverishing yourself and/or your estate, but yet -- on paper, but yet not actually impoverishing yourself in reality.

So consider that. Now, let's talk about annuities and bankruptcy. One of the important parts of asset protection planning is always to consider bankruptcy and bankruptcy law. And these two things flow together in a very tight way. If you disconnect them, you miss out. And one of the ultimate reasons is basically the last-ditch effort of a creditor is to force you into bankruptcy, to force you into an involuntary bankruptcy.

So you can be in a situation in which you never borrow money. You have assets. You never borrow money. And because you never borrow money, then you're not at a high risk of bankruptcy. No one's going to foreclose on your house if there's no mortgage on it. Nobody's going to repossess your car if there's no car payment.

Your credit card company can't sue you, and you have to declare bankruptcy if you don't have any credit card debts. But you've still faced some kind of legal liability or legal judgment, and you lose that lawsuit. You lose that lawsuit. Your creditors come after you. They can't get anything because all of your assets are owned in exempt asset classes.

And because of this, you're still protected. But their ultimate recourse is, if they can follow all the rules, to force you into involuntary bankruptcy and then file their petition in bankruptcy court and be paid out by the bankruptcy trustee. And so that's one of the reasons why we always think about bankruptcy.

Then, of course, the more practical reason is we always think about bankruptcy because it's always possible that you could go bankrupt. So let's talk about annuities in bankruptcy. In annuities, depending on whether your annuity is counted, whether your state uses the federal bankruptcy codes or its own state-specific codes, your annuity can be an exempt asset.

According to the federal bankruptcy exemptions, your exemption for an annuity in an IRA is going to be the same as, or other non-qualified retirement plan, is going to be the same $1.2 million that is protected by the federal bankruptcy exemption. Each state has their own particular annuity exemptions as well.

So you can look into the bankruptcy exemptions, and you should, because remember, that's always one of the key points, one of the ultimate last case ways that a creditor can collect against you is force you into involuntary bankruptcy. One other component of annuities that I want to talk about, though, is in terms of one of the exceptions, especially in bankruptcy court, one of the exempt income streams.

So annuities that are providing an income stream can usually be exempted from bankruptcy court if the annuities are for managing insurance proceeds, the payout of an insurance policy, or annuities are the rollover of some kind of pension account, IRA, 401(k), retirement account, or are sometimes lottery winnings or a structured settlement from a lawsuit.

And so one of the useful things that you should always consider is if you're going to receive a lump sum of money, and you want that lump sum of money to be protected from the claims of creditors, perhaps you should receive that lump sum of money as an annuity payment.

That's really important, especially when it comes to things like life insurance payouts. Many people have this idea that with life insurance, the best thing to do if you're going to be the beneficiary of a life insurance policy is that you should just automatically take the money and run, take the lump sum and run.

That might be fine. That might be wise. You maybe should take that lump sum of money, take the $2 million, call up your investment manager and invest it into a portfolio with your investment manager. But if there's any kind of possibility of a contentious situation with a creditor, or if there is an active situation of a contentious situation with a creditor, you should be very, very careful.

Remember back to the example that I talked about where an estate has creditors. What would you do if you are in a situation where you know that when you die, your estate is going to have many, many creditors, those creditors are going to file claims against your probate estate, but yet you're still seeking to care for your spouse and your children?

Well, if I were in that situation, if I had a lot of creditors that were coming after me, basically the instructions I would give to my wife would be very, very simple. Number one, honey, we've got plenty of life insurance. The life insurance proceeds are going to be protected from the claims of creditors.

Doesn't matter how all this stuff works, shakes out with regard to all these claims of creditors of our estate, my probate estate is going to have to be settled, it's going to pay for the claims of creditors, but the life insurance contract is protected. Number two, honey, keep the money with the insurance company.

Do not co-mingle the money. Do not take the money and put it in a bank account. Even if it's ultimately protected based upon its origin, based upon its provenance, even if it's ultimately protected, that doesn't mean that it's practically protected. And all of a sudden I start mingling the money with the other assets, and all of a sudden creditors start taking out judgments, they file claims against bank accounts.

Don't co-mingle the money. Keep the money with the insurance company. A good insurance company is happy to have the money, they'll pay you a good interest rate out, they'll keep it totally separate, and you'll never have any problem whatsoever of proving that the money is with the insurance company.

Take a small sum of money from the insurance contract. You can usually, with most big insurance companies, they will send you a checkbook. They'll send you a checkbook, you have a million dollars sitting with them, they'll send you a checkbook. You could write one check for one million dollars, take it down to your bank and you can cash that check.

I would tell my wife, "Do not do that." You can also take that checkbook and you can stroke individual checks to the funeral home, you can stroke individual checks to the landlord, you can stroke an individual check to yourself and you can cash it and use that to buy groceries, whatever you want to do.

Use the checkbook and take a little bit of lump sum of money out in order to pay for expenses. Then, I would very seriously charge her, "Consider just taking an annuity from the insurance company." Now, obviously the insurance agent and the insurance company have an incentive to sell you an annuity.

The insurance agent wants to make their money. But that doesn't mean it's a bad thing for you to have the annuity. And annuity payments that are as received as insurance proceeds are protected from the claims of creditors due to their original characterization and due to the federal bankruptcy laws.

So those annuity characterizations are really, really important. You can take an annuity for some of the money, you can take an annuity for all of the money, you can take an annuity payment that comes in for life, you can take an annuity payment that comes in for life with benefits.

There are dozens and dozens of options and you can set it up properly where the spouse and the children are taken care of. And you can do this and keep all the money protected from the claims of creditors. You can take an annuity payment, you can purchase a life insurance contract.

My wife could purchase a life insurance contract on her life with the kids as beneficiaries. Again, we've got everything outside of the probate estate, everything outside of even the taxable estate if we set it up separately. It's a powerful, powerful tool. So don't ignore the value of annuities, especially for things like insurance proceeds from a death claim.

It's one of the best, simplest, cheapest ways to provide for a spouse, especially if my estate is embroiled in all kinds of problems. Maybe I started a big business, I've got financial problems all over the place, I've got creditors calling left and right, I've got legal judgments against me, I've got, who knows, civil judgments against me, same thing, I've got criminal judgments against me, I've got problems all over the place.

That life insurance policy is a very, very useful tool. Turn that life insurance policy into a stream of payments for my wife, she's going to be cared for even as the lawyers deal with the mess of my estate. That's one of the reasons I love life insurance so much.

Now let's talk about a couple of really kind of top end ways that annuities can be used. This is going to go with some really high end financial planning. I know we're going long, I know we've got the lawnmowers going in the background, forgive me it's the challenge that Florida podcasters face, is figuring out how to have a quiet place away from the lawnmowers.

But I feel like this is worth it. This will not apply, this is no longer dealing with mere mortals, so if you're a mere mortal and you don't care about this stuff, just skip on past. But if you're dealing with the higher end stuff, there are some other interesting ways that annuities can be used at the very, very high end.

Thus far in this show, when I have been using the term annuity, I have been referring primarily to commercial insurance products, annuities that are purchased from commercial insurance companies. But the use of the word annuity is not exclusive to commercial products. So I'm going to deal with one example here from going offshore and how annuities can be a useful component of going offshore, especially if you're already in an antagonistic situation and you're trying to plan in the middle of dealing with the uniform fraudulent transfers provisions.

And then I want to deal briefly with annuities in an estate planning context, specifically grats and crats, and how these can be useful to you if you are dealing with a large estate and how you can still get creditor protection. My source here, I'm going to read to you a short excerpt from perhaps one of the most useful higher end asset protection planning books written by Arnold Goldstein and Ryan Fowler called Asset Protection in Financially Unsafe Times, a guide for professional advisors and their clients.

It's one of the higher end books and it's fairly dense. So if you're a professional financial planner, you'll find this useful. If you are not interested in the dense, like if you're not comfortable with a lot of the terms, etc, this is not a good starting level book for you.

So listen and always listen to things that are beyond your current vocabulary, but this will not be a good place for you. But I want to read a short excerpt from page 65 of the book, 65 and 66, wherein the authors are talking about how to plan against basically the uniform fraudulent transfers laws.

So quick reminder, when we get to offshore planning, which I'm probably not going to do in this series just because it's beyond my legal competence and it's better to talk to an attorney, but when you get to offshore planning, one of the biggest challenges that you face is the risk of being held in contempt of court.

If you go and talk to an attorney today and you start talking about asset protection planning, usually they'll jump first to exemptions. Everything that I've been talking about here is in terms of exemptions, exemptions, exemptions. The reason is because exemptions are solid. They're well codified in law, they're well practiced, they're proven, exemptions work.

That's why I'm talking about exemption planning. When you start to go offshore, then either sometimes you're trying to protect things based upon privacy or you're trying to get into some additional legal trickery. And the risk is simply this. You can set up an offshore asset protection trust, but your risk is what if the judge just says to you, "Repatriate the assets." And you've got to prove to the judge that you can't repatriate the assets.

Because if you say to the judge, "Hey, judge, listen, I'm sorry. This money's in an offshore trust. I'm not the trustee of it. I have no authority over the trust itself. I just can't do it." Well, that's the idea behind good legal planning with an offshore asset protection trust is you basically put yourself in a situation where you say, "I can't do it.

I can't repatriate the money, judge. I'm sorry. I have no problems." If the judge doesn't believe you, what'll happen is the judge will find you in contempt of court and they'll throw you in jail and so you'll sit in prison. Yeah, your creditors aren't getting paid, but you'll sit in prison.

And there are plenty of examples of people who have faced that situation. You're held in contempt of court. You're sitting in prison. Judge says, "We can get out of prison whenever you bring the money back." And they just don't believe that you can't get the money back. So it's not enough just to say that you can't get the money back.

You've got to actually not be able to get the money back. And you can set it up in such a way with your offshore trusts that you can't actually get the money back, but yet you could still benefit from the trust. It can be done. And there are plenty of people who have won their cases against even regular creditors, against super creditors like the IRS.

You can set it up so that you can win the case. It's beyond my ability to do that, but I'm convinced based on looking at some of the cases, looking at the writings by the attorneys, it is possible to do. But you've got to do it right. And one of the things about doing it right is you've got to do it in advance, but it's especially problematic if you're facing certain issues where circumstances have already arisen that are giving threat to the claim.

So listen to how an annuity can be used in an offshore trust. I love this example here that the author gives here and how annuities can provide a useful component of offshore planning. Again, reading from Asset Protection in Financially Unsafe Times, a guide for advisors and their clients by Arnold Goldstein and Ryan Fowler.

The first thing you need to know about offshore planning is not all offshore plans are immune from creditors. In fact, most aren't because most aren't set up properly. Several high-end, expensive offshore plans, all involving a straightforward transfer of assets to an offshore trust, have in actuality failed when put to the test.

The good news about offshore planning is your assets move outside of a US judge's jurisdiction. Therefore, when implemented in a careful and proper manner, offshore planning may work even if the transfer is deemed fraudulent. However, the bad news is while your assets are outside of a judge's grasp, you are in the judge's grasp while you remain in the USA.

A judge could order you to repatriate offshore assets, and unless you can prove your inability to do so, he can incarcerate you for failing to do so. In light of the above, it is best to treat your offshore transactions as if they were still subject to US law, because you are, and I'll interrupt the commentary here to say, unless you aren't, which you should also make provisions to get yourself outside of the US and not be underneath the US judge's jurisdiction.

Go back to the text. If the transfer is not voidable under US law, then you don't even test the offshore aspect of your plan. In other words, you'll have other layers of defense that need to be breached before the offshore aspect kicks in. This is what asset protection planners refer to as multi-layered protection, or defense in depth.

In regards to this strategy, it's usually not wise to use an offshore asset protection trust as a first line of defense, because under the laws of 42 states, the trust's assets are attachable by creditors. This means a US judge might not look too kindly on your offshore trust. The trick is to avoid badges of fraud as much as possible.

Make your transfer an exchange of equivalent value, use charging order protection, which is recognized under US law as opposed to a foreign jurisdiction self-settled asset protection trust law, which isn't, and have a valid economic purpose for your transfer so as to demonstrate your transfer was done with an intent other than to defraud a creditor.

After all the foregoing has been done, you still need to make sure your transfer offshore is done so that you can prove to a court it's impossible for you to repatriate assets, especially if you do offshore planning after creditor threats arise. Thus, if your transfer is deemed fraudulent, you can't be held in contempt.

With the above in mind, there is a provision of the Uniform Fraudulent Transfers Act, UFTA, that gives a proper offshore plan a lot of power. This provision is so powerful that one may call it the holy grail of asset protection planning. It may be the only way to fully protect your assets if a storm of the century lawsuit arises and you don't yet have an asset protection plan, which means anything you do is at risk of being deemed a fraudulent transfer under Section 4A1 of the UFTA.

This provision is Section 8A of the UFTA. It states, "A transfer or obligation is not voidable under Section 4A1 against a person who took, in good faith, and for a reasonably equivalent value or against any subsequent transferee or obligee." This is important to understand. The UFTA gives one and only one situation where a transfer is not voidable, meaning the transfer won't be undone, even if the transfer was done with fraudulent intent.

The transferee must have given the transferor something of equivalent value for the transfer, and the transferee must have done the transaction in good faith. Setting up an offshore trust or LLC by itself does not meet these criteria. Transferring assets to an offshore trust almost always involves a gift, and therefore there is no exchange of equivalent value.

Although an exchange of equivalent value is present when you capitalize an offshore LLC, you get an interest in the company in exchange for giving the LLC assets, the LLC will probably not be considered a transferee in good faith if you are the one who set up the company. For the good faith criterion to be met beyond dispute, the transferee must be a completely impartial party who does the transaction in their normal course of business.

Fortunately, there is such a transferee, an offshore insurance company. Let's examine the following scenario. An offshore insurance company manages $250 billion in assets and has been in business over 100 years. A creditor threat materializes and you're caught unprotected or your asset protection plan is seriously flawed. Consequently, you place your liquid assets in an offshore LLC, and you take the equity out of your real estate and other assets by setting up and exercising lines of credit with the hard assets as security for the lines of credit.

You then place the line of credit funds offshore as well. Your offshore LLC then uses these funds to purchase a foreign annuity from the foreign insurer. In doing so, you have accomplished the following. One, you've transferred your assets to a non-insider for something of equivalent value, the annuity contract, that has little or no worth to a creditor.

After all, even if they could seize the annuity contract, which they couldn't, they'd have to wait years to receive enough payments to satisfy their judgment. There is a viable economic purpose for this other than asset protection, and therefore you make it harder for a creditor to prove the transfer was done with fraudulent intent.

Two, because the transfer was made in exchange for an item of equivalent value and the annuity purchase was in good faith in regards to the transferee, the insurance company, the transfer is not voidable under Section 8A of the UFTA, even if the debtor did it to hinder, delay, or defraud a creditor.

Three, the foreign insurer is a large, reputable, and well-established, and is in a jurisdiction that not only does not recognize a U.S. court order, but forbids annuity contracts from being surrendered to creditors. This is almost certainly ample evidence that the debtor is unable to repatriate assets if the transfer is voidable, which greatly reduces the chance of being held in contempt if assets are not repatriated.

We must note that you may be able to use this strategy by purchasing a domestic annuity, however there are some problems with the domestic approach. Notwithstanding Section 8A of the UFTA, some states' laws, especially fraudulent conversion laws, may specifically set aside purchases of annuities or life insurance if done with fraudulent intent.

Also it is almost impossible to set up an annuity where payments are made to an LLC, or other entity the debtor could then receive distributions from, without that entity being subject to reverse piercing. For example, if an LLC received annuity payments, this might not be considered a valid business purpose for the LLC, and thus the LLC could be reverse pierced.

In comparison, an offshore structure must be used in order to purchase an offshore annuity, as the foreign insurer will not do business directly with a U.S. person. Consequently, if annuity payments are made to the debtor, or to an entity he holds an interest in, then a creditor may or may not attach those payments when they're made, depending on whether or not those payments are exempt from attachment in a particular state.

Offshore planning has the additional advantage of placing assets outside a U.S. court's jurisdiction, assuming we can prove it's impossible to repay trade assets of course. Offshore annuities are much more flexible and typically have a much higher rate of return than domestic ones, and the offshore annuity may be exempt from creditor claims under foreign law.

I give that to you with those two pages from Goldstein and Fowler's book, because you may need it someday, especially if you are a person of means, but don't rely on that, don't be in that situation, I beg of you, don't be in that situation where you are ultimately exposed.

Do the planning now, and your planning will be much, much stronger. But if you're ever in a situation where you need it, you now know where to go for one idea that could possibly save your assets if you are facing a massive, massive problem. I want to close with a brief discussion of a couple of estate planning tools that can also be basically formed as a form of annuity.

There are a variety of different estate planning tools that involve the use of the name annuity. Remember, an annuity can be something that you purchase, but it's basically a concept which means a distribution of money for an expected period of time, sometimes based upon the life of a person, sometimes just a series of payments.

And so in estate planning, there are a number of estate planning tools that we use. And usually you'll hear estate planners refer to these by their acronyms. And the acronyms mean different things. So for example, you can have a CRAT, a Charitable Remainder Annuity Trust, or a CRT, a Charitable Remainder Trust, and you have a CRUT, a Charitable Remainder Unit Trust, or a GRAT, or a GRUT, or all these different things.

But when you use the term annuity, then you can think about this in the context of exemption planning. So let me just give you two examples here. One example would be a Grantor Retained Annuity Trust. Now a Grantor Retained Annuity Trust, commonly referred to as a GRAT, is a way that you set up your assets to try to build estate tax savings.

And here it's usually an estate planning tool. And the reason we're talking about this is asset protection draws from business planning, it draws from estate planning, it draws from tax planning. But a GRAT is a way that you save on estate taxes. You set up a Grantor Retained Annuity Trust and you make a large donation to that trust.

It's an irrevocable trust. And then when you transfer money, you'd make the donation to the trust, the GRAT pays the original person, the trustor, an annual annuity payment for a fixed period of time. And then at the end of the term, at the end of the time, then any remaining assets that are in the GRAT are passed on to the beneficiary as a gift.

And the tax benefit comes from the idea that the principal donated to the GRAT will increase in value and that the interest that's paid back to the owner will be less than the appreciation. So you're moving money out of your taxable estate into another, into a separate entity, a separate trust, which will then go on to your beneficiary.

And you take various exemptions, sorry, various deductions of value for that and you take various tax deductions for that. Now you can do something similar with a Charitable Remainder Trust. A Charitable Remainder Trust is the idea where you transfer property into the trust, you receive annual payments from the trust for your lifetime, and then when you die and the trust terminates and the money, the remaining assets that are in the trust go on to a charity.

And so you're allowed an income tax deduction when you make the contribution and you can take various discounts on the assets because of the controlled nature of it. And so it can be a very useful thing. But these can also be used as a way of your protecting significant assets from the claims of your creditors.

For the sake of brevity, I'm going to read two more pages from Goldstein and Fowler's book wherein they talk about Charitable Remainder Trusts. And you can see how this can be used also with regard to asset protection and protecting assets, getting them outside of your estate, saving money on estate tax savings, taking an income for yourself, protecting that income from the claims of creditors.

And then also here they talk about setting up a wealth replacement trust so that your children are also cared for. Let me read the text and then if I feel like it needs it, I'll explain any details. Charitable Remainder Trusts. The Charitable Remainder Trust is defined by section 664 of the Internal Revenue Code, is a popular estate planning tool that provides for multiple benefits.

Essentially a grantor transfers property to a Charitable Remainder Trust and receives annual payments from the trust for his lifetime or for a designated number of years, after which the trust terminates. Upon the trust's termination, all remaining assets, the remainder, pass to a charity or charities in accordance with the trust agreement.

Even though remaining trust assets do not pass to charity until the trust's termination, the grantor is allowed an income tax deduction the year the trust is created that is equal to the estimated value of the charitable remainder gift. This deduction is often very significant. For example, let's say Tim creates a CRAT, Charitable Remainder Annuity Trust, CRAT, and funds it with $1,000,000.

The CRAT will terminate upon his death and in the meantime, he receives annual income payments of $100,000 annually. In accordance with IRS-approved actuarial tables, by the time Tim dies, the trust should have a remainder of $500,000. This means in the year the trust is created, Tim may take a $500,000 income tax deduction.

Assuming Tim receives $500,000 or more that year as ordinary income, then his tax savings will be more than $170,000. There are essentially three types of charitable remainder trusts. The Charitable Remainder Annuity Trust, CRAT, Charitable Remainder Unit Trust, CRUT, and the Net Income with Makeup Charitable Remainder Unit Trust, NMCRUT.

CRATs distribute a fixed dollar amount each year, whereas a CRUT has a percentage of overall trust assets distributed each year. The value of the CRUT's corpus is evaluated annually in order to determine the actual dollar amount distributed. We'll discuss the NMCRUT later. For a CRT to qualify, a Charitable Remainder Trust to qualify as such, it must meet the following criteria.

A CRAT must pay at least 5%, but no more than 50% of its initial corpus annually. A CRUT must pay at least 5%, but no more than 50% of its corpus in accordance with its annual valuation amount. At least 10% of the CRT's initial corpus must pass as a remainder to charity.

A CRT may last a maximum of 20 years or for the lifetime or lives of the grantors. When the grantors die, all remaining trust assets must pass to a charity that meets the criteria set forth in Section 170(c) of the Internal Revenue Code. CRTs are ideal for almost anyone who plans to give away some of their estate to charity when they die.

This is because a normal charitable gift upon their death only qualifies for an estate tax deduction, wherein the gift is not included in the grantor's taxable estate. However, property gifted to a CRT qualifies for an estate tax and income tax deduction. Plus, the CRT assets may be invested and grown inside the CRT tax-free.

Only annual distributions to the grantor are taxable when they are made. Because a CRT's assets are exempt from taxation while in the trust, many tax planners recommend the transfer of highly appreciated assets to a CRT, so those assets may be sold tax-free while the assets remain in trust. Although many people like the fact that the CRTs meet their charitable goals while providing a steady income stream and a sizable income tax deduction, some people are hesitant to use one because they'd rather have their wealth pass to heirs.

However, if a CRT is used in conjunction with a wealth replacement trust, then the grantor, charity, and heirs all come out on top. This is because the income tax deduction taken when a CRT is funded provides extra cash that may be used to purchase a life insurance policy held in the wealth replacement trust, which is essentially an irrevocable life insurance trust in ILLIT.

When the CRT's grantor dies, the life insurance proceeds pass to heirs in lieu of the charitable gift. Thus, the charity receives the gift from the CRT, the heirs receive the life insurance proceeds, both assets pass outside the grantor's taxable estate, and everyone is happy. Though CRTs have many benefits, one complaint we often hear is that a grantor must receive distributions from the trust each year.

Many individuals would prefer to receive little or no distributions initially and then receive more distributions later after they retire. He goes on to talk about how he can make up that difference by using a NIMCRUD. Let's skip that. From an asset protection perspective, how does the CRT fare? The answer is the principle fares well, but the income distributions may be attached by a beneficiary's creditor as they're made.

The workaround, of course, is to make the beneficiary, get ready for this, a disregarded entity multiple member LLC, a DEM LLC. Although a person or entity other than the grantor or DEM LLC may be used, this may not be a good idea as the income will probably then constitute a taxable gift from the grantor to the beneficiary.

Since the DEM LLC is completely disregarded from the grantor, however, it may safely be designated as the CRT beneficiary without triggering adverse tax consequences. Alright, if you're still with me, briefly, let me explain what a DEM LLC is and why this is important for an asset protection strategy. These authors put forward the concept of a disregarded entity multi-member LLC.

You create that disregarded entity multi-member LLC and you've set it as the beneficiary of the charitable remainder trust. Now, an LLC is a pass-through entity that can provide, because of the entity selection, some asset protection benefits. But usually, if a pass-through entity is going to be pass-through from a tax perspective, it's only going to be taxed based upon the beneficiary of the LLC, it's usually a sole member LLC.

And so the question is, how do you get asset protection planning for a sole member LLC? You really don't. A sole member LLC does not provide much asset protection planning, especially in this kind of context. So what you need is a multi-member LLC. But how do you create a multi-member LLC that passes the income through but gets you asset protection planning?

And so what they have done is advance the idea of creating a defective trust, so a defective grantor trust that's an irrevocable grantor trust, and making that irrevocable grantor trust one member of the LLC. Because the trust is defective, the income tax liability of that trust, even though it's an irrevocable trust, the income tax liability of that trust stays with the grantor.

But then the grantor is additionally an additional member of the LLC. And so functionally what you've done is you've created a multi-member LLC that satisfies the asset protection needs of having a multi-member LLC, wherein all the members of the LLC, the tax liability stays with one single member. Because that single member has the tax liability as the member and also as the grantor of the defective trust.

So that's what the DEM LLC is. So if you create a charitable remainder trust, you have a measure of asset protection for those assets. And let me just expand on the beauty of this particular concept. Who are we trying to protect here? We're trying to protect the individual, the wealthy individual who has assets and they want to receive income tax deductions, estate tax deductions, and creditor protection.

So they transfer the assets into the charitable remainder trust. That's good. You transfer the assets into the charitable remainder trust. The assets in that trust are protected from the claims of the individual while they're in the trust. But because the individual is receiving annuity payments, those annuity payments are exposed potentially as an income source of the individual to the claims of their creditors.

That's okay. We solve that in a moment with the DEM LLC. But while the assets are in that remainder trust, they're protected from the claims of the creditors. Those assets will flow eventually to a charity. So that charitable contribution is protected for the ultimate charity. By setting up a wealth replacement trust, a trust that holds a life insurance policy on the life of the wealthy person, with that life insurance policy flowing to the beneficiaries, flowing to the children, you've protected those assets from the claims of creditors.

And you use the income tax savings to fund the wealth replacement trust to pay for the life insurance premiums. Because it's life insurance, you have protection. Because it's the beneficiaries, you have protection. Because it's the irrevocable trust, you have protection. So that's useful. So that protects the assets for the beneficiaries, for your children.

It protects the money for your children. And then the ultimate little flourish on top is you add this disregarded entity multi-member LLC. And you make that disregarded entity, the DEM LLC, the beneficiary of the charitable remainder trust. Which means the assets flow into that LLC. The LLC protects those assets with charging order protection from the claims of creditors.

But yet you don't create a tax problem because you the individual are still receiving, as the ultimate tax person, you the individual are still receiving the benefits of that charitable remainder trust. But those income streams are protected from the claims of creditors if necessary. I hope you made it with me.

This series is for mere mortals. And so I've been trying to keep everything low hanging. I didn't want to get into state advanced stuff. I love the stuff. But it's just not applicable to most people, including most listeners of the podcast. But hopefully it piques your interest of some of the fun things that are available to you when you are wealthy enough to pay the legal fees.

Remember, there are thousands of lawyers that sit around and read the rules and come up with all kinds of fun stuff like this. And you can have access to them too. Just pay the right fees. So there's one set of tax code. It's just that rich people pay lawyers to read it and figure out how to exploit it.

Everything we've just talked about is totally legal. I'm not sure how much of it has been tested in court. I have not studied the court case to see how it has held up. But I see no... In my layman's approach, I see no reason why there's a problem. I'll let the attorneys argue that out later.

But it should open up to you some of the ideas. I just wanted to mention those ideas because they also involve annuities. I get so sick and tired of people dumping on annuities. They also involve annuities, but not commercial annuities. The foreign annuity where we talked about the offshore LLC purchasing the foreign annuity, that involved a commercial annuity just from an offshore company, which is important.

But then this stuff just involves the concept of an annuity, but doesn't involve a commercial annuity. It just involves an annuity schedule of payments coming out of an irrevocable trust. I hope that's enough to get you thinking. Again, we passed through mere mortals, but everything at the beginning of the show was low-hanging fruit.

Annuities, you can use them yourself. The middle stuff, you can do that as you start to build up your offshore plan, as you start to go offshore yourself, as you start to accumulate assets offshore. Annuities can be very useful there for you. And then kind of the ultimate, hopefully you enjoyed the final flourish, is you can start to use this to dispose of an estate and to protect a large estate from the claims of creditors while also minimizing estate taxes, income taxes, and securing your wealth for future heirs while also making charitable contributions.

Hope you're enjoying this particular series. I don't have any closing announcements. I just encourage you to go to RadicalPersonalFinance.com, switch over to the website, a new website. It's profoundly simpler than the old one was and profoundly more obvious where you can buy stuff from me. Go to the store.

At the moment, there's only one course listed, but if you're listening to this in the future, come on back. There'll be more there in the future. Go to RadicalPersonalFinance.com, click on store, buy the credit card course, and then keep an eye out to see what's there. More ads coming in the future.

I'll be back with you very soon. With Kroger Brand products from Ralphs, you can make all your favorite things this holiday season, because Kroger Brand's proven quality products come at exceptionally low prices. And with a money-back quality guarantee, every dish is sure to be a favorite. Whether you shop delivery, pickup, or in-store, Kroger Brand has all your favorite things.

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