Wealth Builder Annuity FAQ by corbinlindsey


									WealthBuilder® Annuity Frequently Asked Questions
1) What is WealthBuilder® Annuity (WBA)? WBA is the simplest income deferral tool in the “advanced” marketplace. 2) How does WBA work? WBA is simply the sale of a short-term account receivable (A/R) in exchange for a long-term payment obligation by a “factoring” company. Example: Dr. Smith’s medical practice has $100,000 of A/R from Blue Cross/Blue Shield. Dr. Smith does not need that income and would like to defer it and have the deferred money grow at market rates until he turns 60 years old (he is currently 40). The medical practice would contract with a factoring company to sell the $100,000 of A/R it is owed from BCBS. The factoring company buys the A/R and issues to the medical practice a long-term installment note that will pay upon the terms dictated by the practice (in this example, the money will come back in 20 years with growth). 3) Who collects the A/R after it is sold to the factoring company? In the above example, the medical practice will act as the agent for the factoring company. The medical practice will collect the BCBS receivable and will deposit that money into a new bank account for the sole benefit of the factoring company (or the medical practice could endorse the BCBS checks over to the factoring company). 4) Where is the money at the factoring company invested? Once the money has been delivered to the factoring company (in total), the money is invested into equity indexed annuities (EIAs). Equity indexed annuities themselves have principal protection (meaning the account value will not go backwards) and growth pegged to the best measuring index which is the S&P 500. 5) Who is the factoring company (FC)? The FC is Peachtree Financial Solution. Peachtree is a specialty finance and transactional taxplanning firm employing over 200 professionals in offices located in Atlanta, GA, and Boca Raton, FL. Peachtree has in excess of $500,000 million in committed financing lines for its specialty finance businesses and has originated over $2 billion in assets. Peachtree is the primary servicer for nearly 10,000 transactions and is backed by the Bank of New York. Peachtree’s servicing activities are routinely reviewed and subjected to agreed-upon procedure audits by their financial partners.

6) Who actually owns the EIAs which are used as the funding vehicle to pay back the installment note to clients who sell A/R into WBA? While it is great that Peacthree is a large company with a solid financial footing, extra precautions are taken to secure the repayment obligation to clients who use WBA. Peachtree sets up Special-Purpose Delaware Trusts (SPDT) as the actual owner of the annuity which is used to pay back the installment note (with growth) to clients. 7) Why SPDTs? Because with an SPDT, the assets of that trust are not subject to the creditors of the parent company Peachtree Financial Solutions. Therefore, if the 200-employee, multi-million dollar Peachtree company goes absolutely bankrupt, it does not affect the SPDT which hold assets to pay back installment obligations to clients. 8) How many SPDTs does Peachtree have? Many. Peachtree places only about 8-10 clients in each SPDT. 9) Who is a candidate to use WBA? WBA is for any client, business, or individual who has supplemental income they would like to income tax defer for “wealth building.” Income is defined as a contractual right to payment that a client is owed by a third party. This includes: Medical fees Attorney fees (especially for attorneys who have large fees from personal injury cases). Accounting fees Insurance commissions Any contractual right (rental income, gas and oil, etc.) Consulting fees Surgery center income Endorsement fees (professional athletes, singers and song writers, movie royalties (or any royalty)) Any 1099 income (including money a professional golfer or even a NASCAR driver makes) NOT W-2 income. Also, if the client is a business, that business must do its accounting on a “cash” basis (vs. accrual).

10) How long can the income be deferred? For up to 30 years (which includes the payment period). 11) Can WBA be used on a monthly basis? Yes. While most clients will want to fund WBA in a 1-3 month period starting towards the end of the year, it is possible to set up WBA on a monthly basis. How? Let’s look at an example: If you had a medical office that had $30,000 of A/R on the books at any given time, it would seem difficult to sell $50,000 a year into WBA. Not so. The medical practice could set up a contract to sell $5,000 a month for 10 month. At the end of the 10 months, Peachtree would fund the EIA which is used to pay back the installment note. (Until the EIA is funded, the money at Peachtree grows at money market rates). 12) Is there any mandatory funding of WBA? NO. That is one of the things that makes WBA so appealing. A client could choose to use WBA one time for $50,000+ and then never do it again, or the client could sell the same amount into WBA each year for 10+ years. Basically, the client has the ultimate flexibility as to how much and when to fund or not to fund WBA. 13) What is the minimum and maximum amount that can be sold into WBA? Minimum: $50,000 per transaction (which could be a monthly fund for 10 months) Maximum: $5,000,000 per transaction (usually only comes into play with a lotto winner) 14) What about employee involvement? WBA is neither a qualified plan or non-qualified plan. It is simply the sale of an A/R in exchange for a long-term installment obligation. Therefore, there is NO employee involvement required; and there is no reporting requirement. 15) What is the minimum repayment period? Anytime after 12 months. Having said that, it would make little sense for clients to use WBA if they are not going to defer for at least five years. 16) Can the installment note be terminated early? Yes. If a client sets up an installment note payment that is not supposed to start paying for 15 years and the client needs money, he/she can terminate the note early (with at least a 2% penalty) and receive the money early. The penalty is required to avoid the installment note being deemed

a “callable” note which would require inclusion of all the money as income at the time the note can be called without penalty. 17) What taxes are due when the installment note pays? It depends on the client. If the client is a company, the company can choose to use the money for any business purpose including the purchase of long-term care insurance on key employees; or the money could simply be bonused to key employees or owners. If the money is bonused to an employee or owner, then all of the money will be subject to income taxes. WBA is not a tax avoidance plan. WBA simply defers income (with growth on the note). 18) What are the up-front fees to use WBA? There is a 5% factoring fee when the WBA is implemented. If a client sold $100,000 into WBA, $95,000 would be funded into the indexed annuity for investment purposes. Isn’t 5% high? Not at all if you consider that most small business owners would like to defer more income into their profit sharing plans even knowing that to do so costs them 20-40 cents on the dollar in employee contributions. Also, keep in mind that we are using indexed annuities; and some of them come with up-front bonuses (up to 6% lump sum or 1% every year for 12 years). Therefore, it is possible for a client to sell A/R into WBA, pay a 5% fee, and have that be a wash due to the bonus of the annuity upon funding. 19) What about ongoing fees? The factoring company charges a 1.5% annual administration fee on the assets in the indexed annuity to administer the program. This amount was modeled after the fact that, if a client took their money home after taxes and invested in a tax-hostile mutual fund, the average fee would be 1.5%. Additionally, if the client used an active money manager, the annual fee would be even higher. Also, remember that there is an element of principal protection with WBA that a client does not have when investing in mutual funds or stocks. This fee is taken out of the annuity every year. 20) Does the IRS know about WBA? Yes. One of the clients who used WBA was audited and passed with no change on an audit done by the Chief Counsel of the IRS. That office issued a Chief Counsel Advisory memo addressing certain aspects of the plan.

21) Should your clients use WBA? Yes, if you have clients with supplemental income they do not need and would like to defer for up to 30 years into a very simple income deferral plan where the money is invested in a secure investment with good potential for positive growth on an annual basis. To download a brochure of WealthBuilder® Annuity http://www.thewpi.org/pdf/WBAnnuity.brochure.01.05.05.pdf (WBA), please go to

If you would like a client or advisor PowerPoint on WBA, please e-mail info@thewpi.org

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