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Annuities and Heirs

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When asked what their most valuable assets are, most clients say their homes or their careers.

While homes and careers are certainly on the short list, after reflection, clients usually agree that their most valuable assets are, in fact, their families, genuine friendships, and time.

As individuals and couples work hard to generate wealth for their own life enjoyment, often with the hope of full retirement in mind, they begin to think about planning to pass a legacy on to their heirs.

(Related: 5 Legacy Planning Basics for New Parents)

For many of our clients, the ability to leave loved ones with financial support is paramount.

Estate planning is complicated, and the rules change frequently. Of course, you should consult with your compliance advisors before talking about legacy planning with your clients. But having a basic understanding of how legacy planning fits in with retirement planning is important to anyone involved with financial services. If you have not yet heard much about the role of annuities in legacy planning, here are some basics to think about.

There are several strategies clients may use to transfer wealth.

Sadly, the most common approach is to have little or no strategy. That means assets pass to heirs through a combination of probate proceedings and any beneficiary designations associated with the consumer’s accounts.

(Related: Don’t Let Your Clients Make the Same Mistake as Aretha Franklin and Prince)

When a wealthy family uses this approach, the difficulties that arise may include a lengthy, expensive estate administration process; legal battles by heirs; unnecessarily high spending on estate taxes; and the possibility that the beneficiaries may be fiscally irresponsible, and may have no help with keeping the inheritance intact.

One legacy wealth transfer strategy involves the use of annuities. That can be a much less time-consuming alternative to extensive trust estate planning.

When I ‘m talking to clients about use of annuities in estate planning, I point out that the contracts come in all shapes and sizes, with various bells and whistles, depending on the insurance carrier, or carriers, being used. But, at their core, I tell clients, annuities are investment products with an insurance wrapper, for a specific purchase benefit.

I explain that annuities purchased for use in wealth transfer can be structured to set up income streams to kids, or even for grandkids, by means of annuities with stretch capabilities. This type of annuity has the following major benefits:

  • To avoid spendthrift fiscal irresponsibility, the annuity can be set up to only allow for specific periodic payments versus raiding of the lump sum.
  • The annuity will allow for tax-deferral, as only the distribution taken will be taxable.
  • Assets in an annuity go, by contract, directly to the beneficiary, or beneficiaries, outside of the probate process.

Some annuities allow greater access to principal than others, and many are specifically designed for wealth legacy planning. Some of the control levels available with these annuities are:

  • No restriction: Beneficiaries can choose the method of payout from a lump sum to various withdrawal strategies.
  • Partial restriction: A portion is paid out as a lump sum and the remainder has a few withdrawal choices the beneficiary can choose from.
  • Full restriction: A lifetime stream of distributions is set up for a beneficiary, or beneficiaries, based on the client’s choice, not the beneficiary’s.
  • Future no restriction: Where the above full restriction is in effect but can be rescinded based on the wishes of the client. The client might, for example, want to set the access restrictions to change once a beneficiary turning a certain age. This kind of arrangement can only be used with certain annuities. Once any annuitization takes place, adding such an arrangement is usually no longer an option.

These types of benefits allow a client to use tailored annuity products to customize distribution plans for multiple beneficiaries, and to account for considerations such as the beneficiaries’ age, level of fiscal responsibility, and special needs.

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Brian Jarosinski (Photo: NFP)

Brian Jarosinski, CFP, ChFC, CASL, RICP, is senior advisor affiliated with the NFP Wealth Team, in Bethesda, Maryland.