Estate planning can help you effectively maximize annuities.
Financial and estate planning are intimidating subjects for many Americans.
These touch on some of the most uncomfortable topics – money and death.
Having been an estate planning attorney for more than three decades, I get it.
To create an effective plan, one must understand the basics.
The foundational documents of estate planning include last will and testaments, general durable powers of attorney, trusts, and advance health care directives.
While some financial assets, like savings accounts, are straightforward, others are more complicated.
According to a Nerdwallet article titled “Annuities: What They Are and How They Work - NerdWallet,” annuities are more complex and require careful incorporation into your estate planning.
Many people use annuities to provide reliable income during retirement.
Annuities are insurance contracts for receiving a series of payments over time.
The time frames can vary from a set period to the rest of your life.
Annuities are commonly used to manage retirement income and have two phases.
The first phase is the accumulation phase.
This is when a person contributes money to the fund.
The second phase is the withdrawal phase.
During this time, the annuity contract pays out.
By keeping your contributed money in an annuity during the accumulation phase, it can grow tax deferred.
Tax advantages, income security, and legacy planning opportunities are all possible benefits to annuities.
They can help provide retirement income and also income for beneficiaries.
These tools can be beneficial, especially in volatile markets, for greater financial security.
Annuities incorporated in estate planning can be used to provide for heirs.
According to a recent Charles Schwab article titled “5 Ways to Use Annuities in Your Estate Plan,” three estate planning strategies can be used during the accumulation phase.
What are they?
Surrender for a Lump Sum.
You can cash out our annuity at the end of the surrender period.
If you do this, you will likely owe taxes and other charges or fees.
You will want to weigh the benefit of immediate liquidity for use in other estate planning needs with the likely fees and penalties for early withdrawal from the annuity.
Transfer to a Trust
You can remove this asset from your taxable estate by creating a non-grantor irrevocable trust and transferring ownership of your annuity to this trust.
As a result, you can protect the fund from creditors and reduce estate taxes while providing for heirs.
Periodic Withdrawals
You may benefit from favorable tax treatment by making periodic withdrawals.
Doing so can manage tax liabilities and income while also providing funds for other expenses or investments.
Regular withdrawals can help you use the value of your annuity without trigger hefty tax penalties.
The strategies available for the payout phase of the annuity will look different.
What options are available to support your estate planning goals with your annuity?
Annual Gifts to Heirs.
You can reduce your taxable estate by gifting money from annuity distributions to your loved ones.
You will want to ensure your gifts comply with the annual gift restriction of $18,000 per year per donee.
Purchase Life Insurance.
If you have a life insurance policy, you can use the distributions to pay the premiums.
By setting up a life insurance policy, you can leave a tax-free inheritance to your beneficiaries.
Charitable Donations.
You can reduce taxable income and support causes of your choice by using the annuity payments to support a charity.
Reinvestment.
By reinvesting the payments from the annuities, you can grow the value of your estate.
Estate planning with annuities can prove more complicated than with many other financial tools.
To optimize your annuity, it is best to work with an experienced estate planning attorney and an experienced financial planner.
Annuities provide income streams for retirement and your beneficiaries.
Although taxes are deferred as they grow, you can reduce the tax liability with strategic payouts.
Using annuities to fund a trust, purchase a life insurance policy, make annual gifts to loved ones, or donate to charity can incorporate this financial tool into your estate plan.
Experienced estate planning attorneys and financial advisors are vital to comprehensive estate planning.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: Nerdwallet (Dec. 21, 2022) “Annuities: What They Are and How They Work - NerdWallet” and Charles Schwab (Nov. 17, 2023) “5 Ways to Use Annuities in Your Estate Plan”
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