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Ask the expert: Use immediate annuities in estate planning?

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The question was: I am considering using a single premium immediate annuity as part of an estate plan for my clients. What are some factors I should keep in mind about doing this?

The answer is: A primary goal of many (if not all) estate owners is to ensure income for themselves for their lifetimes. This goal often surfaces in discussions between clients and advisors when considering lifetime gifts.

“I might need that money” is perhaps the most common objection raised by many clients to suggestions that they utilize the gift tax annual exclusion in making lifetime gifts to heirs.

To the extent that the estate owner is guaranteed that he or she (and his/her spouse, if applicable) can be assured of required income no matter what, annual gifts to heirs (whatever the reason for making them) may be far less worrisome.

If, having secured this required income–perhaps by purchasing an immediate annuity–a client feels able to make more lifetime gifts than he or she otherwise would, the result can be both greater net wealth transferred to heirs (due to lower transfer tax and estate clearance costs) and greater emotional satisfaction. One can live to see his heirs enjoy lifetime gifts. One can also see how well such gifts are managed.

For the parent or grandparent concerned that sizeable inheritances might spoil the kids, being able to see how well those kids deal with the money can be both gratifying and informing. If the kids mishandle such gifts, estate plans can be changed (perhaps by adding additional spendthrift provisions).

Even where lifetime gifts are not a concern, adequate income for the estate owner(s) is usually a key estate planning goal. “We want to provide for the kids and grandkids, but first we’ve got to take care of ourselves” is a refrain familiar to all estate planners.

Allocating a portion of one’s retirement portfolio to an instrument designed specifically to produce income can help one achieve this key planning objective, to the extent of making the allocation of remaining assets easier (or, at least, less worrisome). This can be done using either a deferred annuity or an immediate annuity.

Source: This is an excerpt from The Annuity Advisor, 2nd Edition, a book by John Olsen, CLU, ChFC, AEP, and Michael E. Kitces, MSFS, CFP, CLU, ChFC, published by The National Underwriter Company, Cincinnati, Ohio, 2009, pp. 146-147. The National Underwriter Company also publishes Annuity Sales Buzz. Learn more about The Annuity Advisor .


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