Annuitizing the Inheritance: Tips and Tricks to Get It Right

Constructing a plan to transfer wealth to the next generation is a difficult task for any client who has given serious thought to the potential consequences of their estate planning strategy. Once the client crosses the first hurdle and decides who should inherit his or her assets, the more complex question of how that beneficiary should inherit becomes the issue. 

In order to avoid the potential tax and financial repercussions that a lump sum transfer can create, many clients wish to protect their heirs by providing structure to the way their assets are inherited—and for these clients, one commonly used retirement income planning tool can provide the solution: the annuity.

Why Use Annuities in Estate Planning?

Clients may wish to use annuities to structure an inheritance for a variety of reasons. The reasons for using an annuity as a wealth transfer vehicle often mirror those that apply when a client is planning for retirement—the annuity creates a stream of consistent income over time, guaranteeing that the client’s beneficiary is provided for far into the future. 

This strategy can provide protection for heirs who might be otherwise unable to manage a large one-sum payment, or who might have financial problems that could cause them to spend a large sum too quickly.

Some annuity contracts also offer a feature called a restrictive endorsement that can prevent the heir from selling or assigning his or her rights in the annuity contract, providing further protection for the income stream.

Other clients might wish to include an annuity in their estate planning in order to ensure that specific beneficiaries are provided for outside of the overall estate plan. 

Purchasing annuity products can provide income security for those specified individuals while allowing the remaining estate assets to be used to accomplish other goals—such as satisfying estate expenses or allowing remaining assets to be invested more aggressively In riskier investments that have the potential to generate more growth.

Further, an annuity product may be an attractive wealth transfer vehicle for clients who are unable to obtain sufficient life insurance coverage—whether because of poor health or because of high premium levels.