If you own annuities, you'll love this article. If you don't own any annuities, then pass this article to friends who do (but read the article so you'll know why you should never, except for rare exceptions, buy an annuity).

To start, it should be noted that most insurance companies have a plethora of annuity products, each a bit different. As a result there are thousands of possibilities. The only way to learn your exact deal is to read your annuity contract.

In spite of all the possibilities, there are only two types of annuities you can buy -- an immediate annuity or a deferred annuity.

• An immediate annuity (IA). Joe (age 56) buys an IA for $500,000 from ABC Insurance Co. The IA will pay Joe $30,000 per year starting immediately and payable every year for as long as he lives. The IRS has a table that determines how much of the $30,000 Joe receives is tax-free (really his return of capital, the $500,000) and the balance, which is taxed as ordinary income. If Joe lives long enough, the tax-free portion of all his annual annuity payments will total the $500,000. Guess what? Every penny of the future $30,000 payments is fully taxable as ordinary income. OUCH!

• A deferred annuity (DA). This time, Joe buys a $500,000 DA. Joe can usually annuitize his DA anytime he elects to do so. The longer Joe waits, the larger the annual annuity will be. Once started, the annuity payments are subject to the same rules as an IA. Bad enough!

But worse yet, when Joe dies, the value of the annuity is double taxed. Here's how: say Joe's $500,000 DA is worth $580,000 when he dies. The $80,000 gets socked for income tax, and the full $580,000 is subject to the estate tax.

Why do most people buy DAs instead of IAs? Because they like the idea of the earnings not being subject to current income tax (thus the name "deferred" annuity).

So, the years go by, and 90% of the time, the DA is not annuitized. Of course, ultimately Joe dies. Now a strange but true fact: when Joe bought the DA, many years ago (although he did not know it then), he inadvertently bought a life insurance policy. Why? Because his beneficiary for the DA will get its value as a death benefit. Obviously, a wrong and very expensive way to buy life insurance.

Now stop and think for a while. Based on the crazy (but-it-is-the-law) tax rules. How can an annuity (IA or DA) be good for Joe or his heirs? After 50-plus years in practice, I have yet to have a client, who was subject to the estate tax, who was happy with his/her annuity investment.

Okay, so you own a DA that has not been annuitized. Is there a way out of the annuity tax trap? The answer is probably YES (about 81% of the time). We have a proprietary strategy that we have used successfully dozens of times. But you must be insurable (if single). If married, you or your spouse (or both) must be insurable.

For example, a couple (he is 63; she 64) used their annual annuity payments from a $1 million (at cost) annuity to pay the premiums on a $3.75 million second-to-die life insurance policy that will ultimately go to their kids tax-free. This strategy turns the tables on the IRS without any additional out-of-pocket cost. The strategy works for a single person or just one spouse when the other spouse is not insurable.

I twisted my insurance guru's arm, so he agreed to review the annuity situation for readers of this column. Just two rules:

• You own $250,000 or more in annuities that isn't annuitized

• If single, you are insurable or if married, at least one spouse (or both) are insurable.

To take advantage of this special offer, please send the following info to Irv Blackman, Annuity Strategies, 4545 W. Touhy Ave., #602, Lincolnwood, IL 60712. (1) full name and birthday for those to be insured; (2) address and all phone numbers (business, cell, home) where you can be reached; (3) list of your annuities (only those not annuitized — just name of insurance company, original cost and current value).

Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman, Kallick, Bartelstein LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult, need a second opinion? Call Blackman at (847) 674-5295. E-mail him at [email protected] or visit www.estatetaxsecrets.com.