Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Retirement Planning > Retirement Investing > Annuity Investing

Annuitizing the Inheritance: Tips and Tricks to Get It Right

Your article was successfully shared with the contacts you provided.

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.

Considerations and Consequences

The tax consequences of any estate plan are almost always a prominent concern for clients, and planning with annuities is no different.  It is important that the client realize that structuring the payments so that they occur over time, as an annuity stream, rather than as a lump sum payment can help the account beneficiaries avoid a large up front tax liability.  This is because, unlike life insurance death proceeds, proceeds received under annuity contract are not entirely tax-exempt. 

For some clients, however, an annuity product that provides a lump sum death benefit can prove attractive because it can often be used as both a retirement and estate planning vehicle—meaning that the client can receive annuity payments during life in order to meet retirement income needs and still ensure that a portion of the annuity investment benefits his or her heirs.

It is also important that the client be reminded to update his or her beneficiary designations at regular intervals in order to ensure that the annuity will benefit the correct heir as circumstances change.


Despite the fact that every client’s estate planning goals will be different, it’s important that they be reminded that the annuity product can provide a valuable—and often overlooked—tool to accomplish a variety of these goals. 

Originally published on Tax Facts Online, the premier resource providing practical, actionable, and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

To find out more, visit All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without prior written permission.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.