Prior to the 2008 presidential election, I participated in a national contest of investment managers to see who could come up with the best single stock to buy if McCain or Obama won the election. The competition was managed by Steven Halpern, the publisher of The Stock Advisors, an investment newsletter that tracks the performance of money managers. (www.thestockadvisors.com).

Sensing that Obama would implement massive government stimulus spending on roads and bridges that were “shovel-ready” I selected Ingersoll-Rand, (IR) a terrific global equipment company. While IR itself was not the “shovel-ready boots-on-the-ground” company, it was the next company in line to benefit when construction companies needed to buy new equipment.

My selection was based on my understanding of Keynesian economics, and the income multiplier effect related to increased government spending. Ingersoll-Rand would likely be a beneficiary of the increased government spending when construction companies bought new equipment.

In the AOL Money & Finance national competition for the single best stock in 2009, my pick of Ingersoll-Rand was up 114% in the year. I came in around 12^th place out of 75 money managers.

While my stock selection turned out to be a good investment, I did not realize at the time that I was making it that the Obama administration would engage in policies that would prove to be so damaging to the functioning of the private sector economy.

Having had a year to watch what Obama is doing to the private sector, I have turned my attention away from my exclusive focus on performance and more towards how to help investors survive this sad episode in American history.

The Obama administration is wrecking the private free market by implementing a European-style socialist state.

The huge deficits and long-term debt are not items that can be fixed in the future, without severe civil disruption and social dislocation, This is not a fair political outcome for American citizens, who had no clue about the damage that Obama would wreak on the economy.

The implementation of those policies is the single greatest explanation of why there has been no job creation in America the past year. The private free markets do not create jobs in a socialist environment. The Government can not create jobs, it can only redistribute wealth and income from people who create jobs to people who do not create jobs.

The owners of businesses and banks are too uncertain to make investments that create jobs, and the idea that a $5000 government stimulus from the Obama administration would create a job is laughable.

The future economy will be very bleak and very dependent on the political whims of the political class, just like the economy of Europe, and somewhat similar to the economy in communist China. There will be a very Big Government that interfaces with 1500 of the world’s biggest corporations.

The Big Government will tax Big Business, and then the Government will redistribute the welfare among the population that is not connected to either government or the global corporations.

In that type of investment environment, what should an American investor do for income that is safe from Big Government expropriation?

Prior to Obama, the dynamics of investing included balancing asset allocation, risk management, and investment performance.

Now, investors need to add a new criteria: How to keep assets safe from expropriation by government agents ravenous for more tax revenues. Don’t kid yourself about the threat. Private property that used to be sacred and safe in America is now up for grabs by the government agents, if they can show that taking the property fits the political mission of an economic development project.

The rule of law has been seriously eroded in America, which leads to searching for an investment that has some legal characteristics that will make it difficult for government agents to get their mitts on.

My advice is to place retirement investment assets inside a legal contract, like an annuity, and then pray that the legal contract can not be busted by the agents of government. In the case of expropriation of private property, or in the case of raising income and capital gains taxes, it is simply the lone citizen against the power of government.

In the case of a legal contract between an investor and an insurance company, the deck, while not completely fair, is at least not stacked solely against the individual citizen alone. In order for the agents of government to attack the investment assets inside the annuity contract, they would be forced into judicial proceedings against the insurance company that issued the contract.

For added protection, the legal annuity contract can be placed inside a family estate trust. The government agents may be able to bust the trust, too, but this would be cumbersome for them and they would probably search for lower-hanging fruit.

It is hard to know what the agents of government are going to do, and that is one of the problems of Obama wrecking the private sector. The investment calculation now must overtly include an assessment of what illegal acts may be committed by the agents of government.

When there is no private sector, there is very little citizen recourse against the all-powerful Big Government.

1. the annual payment of allowance or income;
2. the right to receive this payment or to make this payment; and
3. the interest or dividends paid annually on an investment of money.

The IRS considers all annuities to be retirement plans. As such, they are subject to the early withdrawal penalties on monies withdrawn before age 59½. Distributions before age 59½ incur a 10 percent early withdrawal penalty in addition to the income tax liability. This 10 percent early withdrawal penalty is assessed against the taxable amount withdrawn. Income tax liability is assessed against the distribution that represents the gain in the contract. When gain is accessed depends on when the contract was purchased.

There are two time horizons to an annuity, much like an IRA. There is the growth phase, when the assets inside the annuity are being invested and are growing. Then, there is the payout time, when the annuity begins paying out a stream of income.

During the payout phase of an annuity, the payments are normally split between the return of premium and the gain in the contract. This is accomplished by using an exclusion ratio. For example, assume that $100,000 had been paid in premiums to the annuity, and that sum had accumulated to $300,000 during the growth phase.

The annuitant selected an income stream with a monthly payment of $3,000. Of that amount, $1,000 would be considered return of premium, or the cost basis in the contract, and is not taxable. The remaining $2,000 would be considered the gain in the contract and would be taxable.

The total cost basis of the annuity ($100000) is recovered tax-free. When the total cost basis in the contract has been recovered, all future income payments are fully taxable as income.

It would be hard, but not impossible, for the agents of government to disrupt the income stream once it had started, or to tax the cost basis, without considerable difficulty.

One of the most important legal guarantees of annuities is the guarantee of an income stream that the annuitant cannot outlive. It gives the owner the right to use the accumulated benefits to provide income for retirement during the annuity period. The size of the income payment is based on the amount of the accumulated value in the annuity and the assumed interest rate in effect at the time of annuitization.

Even under a socialist regime, it would be hard for government agents to disrupt the legal contractual guarantees of this income stream from the annuity.

Equity indexed annuities are a sort of hybrid between a fixed and variable annuity. This product provides a guaranteed minimum interest rate, along with participation in the market through a selection of indexed strategies, such as the Standard & Poor’s (S&P) 500 Index.

Equity indexed annuities are designed to provide greater interest earnings than a fixed annuity when the market is on the rise, and to protect principal and, in most cases, the credited gains when the market goes down. During bull markets, investors are not used to posting zero gains. The minimum guaranteed value of the equity indexed annuity is one of its most valuable safety features. This is the value that would be paid if the minimum guaranteed value is higher than the surrender value.

An equity (or fixed) indexed annuity is characterized primarily by how its interest is credited. Indexed annuity interest crediting is tied to a market index, such as the S&P 500. If the index rises over the annuity’s term, some portion of that increase will be credited to the contract. At the same time, underlying the contract is a guaranteed minimum rate of return. At the end of the annuity’s term, the greater of the indexed interest or the guaranteed minimum will be credited to the contract.

Components of the equity indexed annuity that are referred to as its “moving parts” are the:

• participation rate
• interest rate cap
• asset fee
• interest crediting methods
• term

Equity indexed annuity owners may have experienced no gain during a particular policy year, but they also experienced no loss. Because any previous gains were locked in, they did not lose the gains that were realized during the previous period. Not many direct market investors can make that statement. The reason is because of indexing with some type of averaging and reset.

The primary attractiveness of the fixed indexed annuity is tied to the participation in a market index. The participation rate is an amount, defined as a percentage, which is multiplied by any gain of the selected index over a stated time period. It measures the percentage of participation of the increase in the index that is to be credited to the annuity account value for the prescribed indexing period.

Some annuities may incorporate an upper limit, or “cap,” on the indexed interest rate that will be credited to an annuity. A cap reflects the maximum indexed interest rate that the annuity can earn over a stated period of time.

The crediting of the minimum interest rate is usually stated as a percent of premium received. For example, if the minimum interest to be credited is 3 percent, the 3 percent may only be calculated on 90 percent of the initial premium. This is vastly different from 3 percent added to the annuity account, as is done in traditional fixed annuities. The following is an example of why the crediting is accomplished in this manner.

Example: An investor places $100,000 into an equity indexed annuity. The company invests 90 percent of the premium and uses 10 percent to buy annuity options. The remaining premium after the option purchase is $90,000. Assume that during the first indexing period, the index has zero gain. The company will credit the 3 percent minimum interest guaranteed rate to the $90,000 of premium that remained after the purchase of the options. This crediting method will hold throughout the term of the policy. If the contract compounds, then the minimum will be compounded during the term. If the contract is simple, then no interest will be paid on the minimum credited until the beginning of the next term.

One technique of buying annuities is to “ladder” them or buy a series of annuities, similar in concept to buying CDs that rollover. This technique is often called a split annuity program. The assets in the existing or current annuity can be recalculated and then transferred through a 1035 tax-free exchange into two new annuities, one being an immediate annuity and the other a deferred multi-year annuity.

When the policy owner of an annuity dies during the accumulation time phase, the annuity can be transferred to the spouse as a nontaxable event. If the beneficiary is other than the spouse of the policy owner, all gain in the contract is taxed as ordinary income to the beneficiary in the year of death.

However, the beneficiary will not be taxed on the gain in the contract in the year of the policy owner’s death if the beneficiary elects within a 60-day period after the death benefit is payable to have the death benefit be paid under a life income or installment option. These periodic payments are then taxable to the beneficiary under the regular annuity rules.

Lump sum distribution is not an option for the beneficiary. Some newer generation products promote the death benefit as the full value, with no restrictions.

The annuity is a legal contract that passes through an estate without probate court proceedings, a very valuable benefit under a socialist regime. Any type of government involvement in the estate settlement process provides an opportunity for the agents of government to intervene to obtain the assets or tax them.

An additional layer of legal protection can be obtained by placing the annuities inside a living family trust, also called a revocable trust.

An even greater level of legal protection can be obtained by combining the use of a family trust, with a charitable remainder trust. By involving a charity in the annuity estate settlement proceedings, the owner gains a new team member to fight with the government agents.

If and when the agents of government decide to attack the annuity.

The threat of socialism for private property expropriation by agents of government is real and imminent in America. As sad as it is to contemplate the lost heritage of individual freedom, it is absolutely necessary to take steps now to protect family assets.

One way to protect assets from a socialist regime is to place assets in legal contracts that will make it difficult for the agents of government to expropriate them.

The best type of annuity to buy today may be the newer Fixed Index Annuity. If you would like to know more about how this product works, or how you can buy one, please contact me at tvass@businesscapitaladvice.com or call me in Raleigh NC at 919 975 4856.