1035 Exchange for Expensive Annuities:

Client Background:

A Multi-Family Office (MFO) was managing a balanced portfolio valued at over $20 million. The portfolio included a combination of stocks, bonds, and alternatives. The MFO, responsible for the wealth management of a specific client, approached Worth Venture Partners (WVP) on behalf of their client, who also had a significant annuity investment exceeding $10 million. This legacy annuity was creating inefficiencies in the client’s overall financial plan, particularly due to its high fee structure.

Challenge:

The client’s annuity had an annual fee of over 3.5%, which was considered excessive given its impact on net returns. Furthermore, the insurance company managing the annuity had a limited selection of investment options, which were incompatible with the broader strategy the MFO had designed for the rest of the client’s portfolio. The MFO wanted to invest in areas that complemented the client’s non-annuity holdings, but the restrictions imposed by the insurance company hindered this. They sought a solution that would reduce the fee load and align the annuity investments more closely with the client’s overall portfolio strategy.

Solution:

WVP offered a creative solution by recommending a 1035 exchange of the client’s annuity. Through the 1035 exchange, the client was able to transfer their legacy annuity to a new insurance company where WVP was an approved investment manager. This solution allowed the client to keep their annuity structure intact while transferring the assets to a platform that provided greater investment flexibility and significantly lower fees.

Key actions included:

• 1035 Exchange: The client completed a tax-free 1035 exchange from their existing insurance company to a new provider.
• WVP as Investment Manager: WVP was appointed as the investment manager for the new variable annuity, allowing for a wider selection of tax-efficient investments.
• MFO as Sub-Advisor: To maintain alignment with the client’s overall portfolio strategy, WVP hired the MFO as a sub-advisor on the account. This helped ensure that the annuity investments were complementary to the client’s non-annuity assets.
• Custom Investment Strategy: WVP, together with the MFO, carefully sourced, selected, and vetted investment options that were tax-inefficient but aligned with the client’s risk tolerance and return objectives. This included diversifying into areas such as hedge funds, private credit, and other alternatives, which offered better synergy with the client’s existing holdings.

Outcome:

The client benefited from the following improvements:

• Fee Reduction: The 1035 exchange cut the annuity fees in half, providing immediate cost savings and enhancing long-term investment returns.
• Tailored Investment Portfolio: The client now had the benefit of a customized investment portfolio that was both tax-efficient and aligned with their overall financial goals. By collaborating with the MFO, WVP helped ensure that the annuity strategy complemented the client's broader investment plan.
• Enhanced Flexibility: Through the 1035 exchange and WVP’s investment management, the client's account was given access to a wider range of opportunities that were previously unavailable in the original annuity structure.

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Note: The tax, financial, and legal aspects of an investment in PPVAs, PPLIs or IDFs are complicated. Nothing herein is or should be misconstrued as legal or tax advice. This summary is included for general information only. Each person considering such an investment should consult with and rely solely upon its own tax, financial and legal advisors to understand fully the possible federal income and other tax consequences. Investment in alternatives, including hedge funds and private equity, can introduce increased risk of investment losses.

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