A. In order to avoid the potential tax and financial repercussions that a lump sum transfer can create, many individuals wish to protect their heirs by providing structure to the way assets are inherited. For these taxpayers, annuities, though commonly used as retirement income planning tools, can provide the solution.
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 protect 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.