Combine Annuities And Life Insurance For Your Clients Estate Plans
Annuities are terrific wealth accumulation vehicles. For this reason they have been popular with clients looking to build retirement accounts. After all, annuities allow for tax-deferred growth, the ability to switch among multiple subaccounts, and other popular features such as a death benefit.
Too often, however, clients and advisors only look at annuities for their accumulation benefits and ignore an annuity contracts other key strength–their annuitization feature. Many modern annuities offer a range of annuitization options, the ability to reset an annuitization approach and the ability to commute the contract. In addition to income benefits, annuitization also offers another key advantage for clients–estate planning.
These can be used to turn an annuity to a clients advantage as an estate planning tool.
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Chances are, if your client has an existing annuity it was purchased for retirement income. Very often a clients situation has changed since that annuity was purchased. If your client has other sources of income (for example, a pension or an IRA, that they must begin to draw on) that annuity will go untouched. They may be very happy with the tax-deferred growth they enjoyed in most recent years and want to pass the value of the annuity on to their family. However, the tax-deferred growth enjoyed by annuities is a double-edged sword.
Like an IRA, at some point income taxes must be paid on the annuitys appreciation. If this is not paid during your clients lifetime, it will be by the heirs or the estate. Since the appreciation will be taxed sooner or later, one approach would be to expose some dollars to taxation today, with overall better results for the heirs.
Without the additional planning necessary for annuities that might otherwise be left to grow, the erosion from income and estate taxes can be a significant problem. In large estates the erosion can be over 70%.
Consider the following example using a typical annuity: Your clients, Tim and Mary, are in the top tax brackets. Some years ago they invested $150,000 in an annuity and are very happy with its growth. The annuity is now valued at $375,000. Both Tim and Mary are 70 and the couple is living comfortably on their other assets. Tim doesnt need the annuity and he realizes that the annuity is an asset in a very sizeable estate that is likely to be taxed at the top estate tax rate. The couple is particularly upset to learn that the annuity will also be consumed by income taxes when their children draw on it.
All of this erosion will reduce the annuity to less than a third of its value. Should the owners die today, a significant portion of the value would be consumed by taxes. (See Table 1.)
In fact, without further planning, the heirs would walk away with little less than the couples initial investment into the annuity contract.