Annuity Wealth Transfer
The Annuity Wealth Transfer Strategy is appropriate for some individuals who are in or near retirement and do not believe they will need any of the money from the annuity for retirement income. For those individuals who wish to pass these assets to loved ones at their death, this concept may dramatically increase the benefits they can provide their loved ones through the purchase of life insurance.
First, determine the after-tax income available either through annual withdrawals from the deferred annuity or from transferring the deferred annuity to a Single Premium Immediate Annuity (SPIA) to ensure the premium dollars will be available for the life insurance premium pay-in period whether it is a lifetime premium or a limited pay premium. Once the after-tax income is determined, illustrations can be run to determine what the maximum death benefit would be and how best to fund, i.e. ten pay, lifetime pay, etc. Keep in mind the exceptions to avoiding the 10% penalty on early distributions prior to age 59½.
For individuals with taxable estates, an Irrevocable Life Insurance Trust (ILIT) should be used to hold the policy in order to avoid taxation of the death benefit. The Irrevocable Life Insurance Trust will keep the death benefit out of the insured’s estate thereby allowing all of the death benefit to be available for loved ones. An ILIT allows present interest gifts of $15,000 per beneficiary to the trust as of 2020. If there are insufficient beneficiaries to fund present interest gifts to the trust, the individual can use a portion of their $11,580,000 (2020) lifetime exclusion for gift tax purposes to fund or could also make private loans to the trust if that was more taxadvantaged.
The Annuity Wealth Transfer Strategy can help individuals who do not need income from deferred annuities and would rather use this unneeded asset to maximize what they are able to provide for loved ones. It can take an asset that may be heavily taxed at death and use the advantage of life insurance to dramatically increase what beneficiaries receive. However, if the client needs the money for their own retirement, this is not an appropriate strategy for that client.
The after-tax income from the annuity will fund a larger death benefit than one realized from just leaving the annuity alone and passing it to your loved ones at death.
What happens if the insured winds up needing the money for their own retirement in later years? All of the well-meaning plans can go awry if markets decline dramatically and there is not sufficient retirement income available from the life insurance policy cash value. If that event should occur, the insured can choose a paid-up policy or take loans to pay premiums on the policy. The income stream from the annuity used to purchase the life insurance policy can then be redirected to the insured to fund lifestyle shortfalls.