5 Strategies for Caring for Your Beneficiaries with an Immediate Annuity
Recently I spoke with a visitor to our web site who had been completely put off by the idea of purchasing an income annuity. When I asked why, he said, “Because I need to provide for my kids – they come before everything.”
Like many, he mistakenly believed that buying an immediate, deferred income, or secondary market annuity meant neglecting his children.
You can provide for your beneficiaries with an income annuity.
There are several strategies that allow you to have all the benefits of an income annuity, and still ensure that your beneficiaries are cared for.
1. Use only a portion of your funds for an annuity; reserve other types of investments for your beneficiaries.
This is very straightforward – sometimes referred to as the "life-only-invest-the-rest" approach -- which many use. What’s more, there may be other good reasons (like safety and taxes) that make diversifying your assets important, too. So decide how much money you can comfortably put into the annuity and leave the rest in savings, stocks, bonds, and real estate for "the kids".
2. Structure an with a death benefit (for immediate or deferred income annuities).
A single life annuity can be structured to pay to a beneficiary in the event of your untimely death. Choose an installment refund or a cash refund option and you will have guaranteed that your beneficiaries get back the remainder of the premium you paid but did not receive while living.
3. Choose an annuity with a joint life option (for immediate or deferred income annuities).
This type of annuity continues payments to your survivor (e.g., spouse, child, or, even, friend) for the remainder of his or her lifetime, in the event of your death. While the initial monthly payment will typically be lower than with a single life annuity, a joint life annuity ensures continued benefits to the person who survives the longest.
4. “Term Certain” option.
An annuity can also be structured to make payments for a specific length of time. Should you die before that term ends, payments would continue to your beneficiaries until the end of the term. A lifetime annuity can similarly be set up to include a minimum number of payments.
5. Purchase an annuity that has guaranteed payments (for secondary market annuities).
Most secondary market annuities are scheduled to make either a series of guaranteed payments or a one-time lump sum payment in the future. This means that your payments are going to be made regardless of whether or not you are still alive. Through your payment servicing company, you will be able to designate beneficiaries that will receive your payments in the event of your passing.
As you can see, most income annuities can be tailored to your individual needs. There is no one-size-fits-all. Since each of the above options has its pros and cons, it’s a good idea to review your plans with a trusted advisor -- to work out which is the best option for your situation.
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I want to buy an immediate annuity but make my brother the recipient of the monthly payments... What are the tax consequences to me, aside from deducting the amount I pay for such an annuity (the gift) from my estates tax free amount?
Hersh Stern (ImmediateAnnuities.com)
First, a disclaimer. I'm neither a CPA nor tax attorney so please meet with one before you take any action.
You certainly can buy an immediate annuity and direct the insurance company to make the monthly payments to another person or entity. That's a common request.
You could set up the annuity with yourself as the policy owner and with payments sent to your brother as "payee." In that case, most insurance companies will issue an EOY Form 1099-R to you as owner. There usually is taxable income earned during the year. Either you send your brother a "wash" 1099-R so he pays the taxes, or you can pay it, as owner.
As owner, you retain the rights to the annuity. So, for example, if you wanted to preclude your brother from ever selling the annuity in order to get a cash lump sum instead, then with you as owner, he will not be able to sell it without your permission.
If you pay for the annuity but make your brother the owner from the get go, then he will have the right to sell it on the secondary market. Also, a transfer for value will have taken place and your brother would be obliged to pay income taxes on the gift (i.e., the value of the annuity) in the year you buy the annuity.
If this is how you prefer to set it up I again strongly advise you to consult a CPA or tax attorney to learn about all the consequences beforehand.