621 / How can an annuity be used by an individual as an estate planning tool?

A taxpayer 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 taxpayer is planning for retirement—the annuity creates a stream of consistent income over time, guaranteeing that the taxpayer’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.

Further, individuals 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 heirs 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.