No one likes to think about it, but it's an important decision that all individuals should make: how to plan for the transfer of your assets when you die. Wills and trusts are critical tools for this function, designed to pass your wealth along to a surviving spouse or another generation as efficiently as possible. But do your beneficiaries have a plan as to how they’ll manage the assets they will receive?
It's a good idea not only to plan for the transfer of your wealth but also to consider how that wealth will be managed once it is placed in your beneficiaries' hands. In some cases the designated beneficiary might not have the wherewithal to manage a large sum of money on their own. Therefore, you may want to establish instructions for the management of your inherited assets while you are alive. That way you can help ensure that your surviving spouse or other beneficiary will have financial support for the rest of his or her life.
One strategy you might consider for your beneficiaries: have the inherited IRA assets placed in a fixed immediate annuity. This could provide a lifetime guaranteed income for your surviving spouse or other beneficiary. Assets from an IRA can be transferred into an annuity tax-free, although income taxes will be due on distributions and are required to begin according to the beneficiary's life expectancy.
An immediate annuity might work well for a beneficiary who is inexperienced in financial matters or would prefer the security that the guaranteed stream of income from the annuity would provide. Payments could be set up to pay for health insurance or long-term care insurance premiums. And additional riders can cover specialized needs, such as, cost-of-living increases or a cash refund of the balance of the annuity to a designated beneficiary upon the death of the annuitant.
Please note that annuities are designed for long-term investing and ordinary federal income taxes and a 10% tax penalty will apply to withdrawals taken prior to age 59 ½.
Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company and are not government insured. Additionally, one should remember that surrender charges could apply to early withdrawals and are often based upon the time the insured has been invested in the annuity. Annuity surrender schedules also vary from company to company.
If you have yet to develop a plan for your beneficiaries and would like an illustration on a fixed immediate annuity, please complete and return the enclosed reply coupon.