Overlooked by most, this post describes the function of immediate annuities as an estate planning tool.
None of us like to dwell on the transfer of our assets after we pass away. However, all of us need to make this vital plan and ensure that the transfer of our assets after our deaths is smooth. The tools needed for this critical function are wills and trusts. They will help you to pass your wealth to either a surviving spouse or your descendants in an efficient manner. Yet another issue you need to consider is the ability and willingness of your beneficiaries to manage the assets you bequeath. Some might just spend it all in a few days.
This means you need to not only to plan for the efficient transfer of your wealth but also ensure that it continues to be well-managed even when you are not at hand to do so. In a few instances, your designated beneficiary might not be capable of managing a large sum without help or guidance. In such cases, you will want to provide instructions (or maybe even restrictions) that will be guide posts for the proper management of assets you plan to bequeath. This will ensure that your spouse or any other beneficiary will have adequate money to meet their requirements for the rest of their life.
One option that you should look into for the long-term well being of your beneficiaries is fixed immediate annuities. By ensuring that money is placed in an immediate annuity, you can achieve many goals. Immediate annuities provide a guaranteed income for life to your surviving spouse or beneficiary. And since the immediate annuity cannot be surrendered for value, the beneficiary does not have the option to cash in the immediate annuity policy and go buy a Ferrari.
Post-tax as well as pre-tax bequests can be used to purchase immediate annuities. It is possible to transfer the assets from an IRA to immediate annuities without paying taxes. However, the income from the annuity will be taxed based on the life expectancy of the beneficiary.
The main features of immediate annuities are two-fold. They ensure an irrevocable income for life while preventing the beneficiary from accessing the principal. Immediate annuities are the appropriate mode for bequeathing an income to a beneficiary with insufficient financial experience or one who would prefer the security of a guaranteed income. Immediate annuities are also appropriate for a beneficiary who might be unable to handle a sudden windfall with maturity. One can also ensure that the annuity payments are used to pay for the health insurance or the premiums for the long-term care of the beneficiary (by naming the payout recipient as an insurance company or perhaps a trust form greater flexibility). One can opt for additional riders to cover specific needs, such as the increase in the cost-of-living. One can specify a cash refund of annuity balance to a particular beneficiary on the death of the main annuitant.
Note that immediate annuities are essentially long-term investment products. Normal federal income taxes will be due on the taxable portion of immediate annuity payments. The benefits and guarantees of these financial products are not insured by the government. They are based, instead on the ability and financial strength of the underlying insurance company to pay the claims.
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