Annuities – Another Estate Planning Tool

Estate Planning tool

Death and Taxes

If you don’t take care of your Estate Planning the government will, but the chances are your loved ones are not going to like it!

Annuities Have Many Uses in Estate Planning

Annuities can be used to leverage a lump sum into a larger sum paid over time.  Let’s say you need to reduce the size of your estate by a million dollars to come in under the federal estate tax limit.  An option would be to gift $1,000,000 to your children, if you have four children you could purchase a Single Premium Immediate Annuity (SPIA) the annuity would pay them $14,000 (current gift tax exclusion per donee ) each for the next 20 years or more and you would avoid the the gift and estate tax just fine.  However, what if you die before the 20 years are up?  The current market value of the annuity  (or remaining payments) would be counted in the parents estate for the lifetime limit amount.  If you die after 10 years and the children are all in a 33% federal tax bracket, and assuming the growth is $40,000 their tax bill would be $13,200 each that’s a savings of $86,800 each compared to a 40% gift or estate tax on the initial amount.

A common misconception is that the insurance company will keep any remaining funds after the person dies.  This is only true if a Life Only payout option was desired and that is rarely used with today’s annuities.  Furthermore, with the Period Certain payout many carriers have a Death Benefit provision in the contract for the remaining balance.  Unlike a life insurance contract the Annuity Death Benefits would be taxed.  The tax would be calculated on the growth of the contract and the beneficiaries income rate.  Not only did you increase the payout amount to your children but you also solved the problem of transferring the funds gift tax free, and you may have reduced the estate tax bill if the kids are in a lower rate.

Annuities Work Even Better When Combined With Other Tools

You could take this same situation a little further and perhaps you want to increase your estate when you pass and eliminate any gift and estate tax.  You could increase the size of your beneficiary’s benefit without increasing the current size of your estate.  We could accomplish this with the use of a SPIA to purchase permanent life insurance.  This leverages your funds twice while passing funds to beneficiaries without any federal taxes.  The first time you leverage the funds is with the annuity using a lump sum for a larger premium payment to the life insurance contract.  The second time you leverage your funds is with the life insurance contract, by using a limited pay UL or Whole Life you have a much larger estate for your beneficiaries.  As a bonus you may still have access to a large portion of the funds once the life insurance contract has been fully funded.

Annuities purchased inside of trusts can also help solve the worries you may have about bequeathing funds to someone who may not be prepared or able to handle a large sum of money.  An annuity can provide a lifetime of income for that person without them having to manage funds or you worrying about them running out of money.

There are many more ways that annuities can be a very useful tool in your Estate Plan.  Let us help you find the solution(s) that are right for you.  We are here to be a part of your team, we can be as big or as small a part as you would like us to be.  If you have trusted professionals who are already helping you navigate, we can shop for the best rates.  However, if you need to start from the ground up we are here to help you assemble the team that’s right for you.

IMPORTANT: Before implementing any Estate Planning techniques you need to consult with a qualified attorney and Certified Public Accountant (CPA) or federal Enrolled Agent (EA) in addition to working with us.  Depending on your location we may have a vetted team of professionals that work together to complete your Estate Planing needs.