Estate planning is the allocative management of wealth conditions that come with terminating one’s life. Preparation and establishment of estates can also involve Annuities, which help provide security to the heirs and even assist in settling taxes.
This article reviews the possibility of using annuities as a component of estate planning and their advantages and disadvantages.
1. Understanding Annuities
‘Annuities are investment products and services meant to provide for a payout at a set interval, usually after retirement. Insurance companies offer them, and they can be of legal size and shape to suit the interested parties’ requirements.
An annuity is a financial product where you pay a lump sum of cash to the insurance company or several installments. Consequently, the insured party promises to make periodic payments to you beginning from a particular period or at a specific future time.
In estate planning, annuities help support beneficiaries with steady cash inflows to minimize the squandering of money.’ says Scott Dingman, CEO of Sell Annuity Payments. They can also render long-term income streams that survivors or dependents can use, especially when life becomes challenging.
2. Types of Annuities
‘There are many kinds of annuities, and each has possible variations designed to meet the needs of a specific investor or particular investment risk profile. Fixed annuities are guaranteed payments, which makes it easier for a person to have an assured income irrespective of the current state of the market.
However, variable annuities enable one to invest in a mutual fund of the security with payments varying according to market value. Payments of immediate annuities start soon after a one-time payment has been made and, therefore, meet the needs of those requiring income soon,’ says Lauren Taylor, Marketing Manager at Emergency First Aid At Work Course.
These plans begin payouts later so the invested dollars can earn compounded interest tax-free until the money is to be distributed. It is vital to make these distinctions so that one can choose the right annuity product to be used under estate planning.
3. Benefits of Annuities in Estate Planning
Estate planning: Annuities come with the following advantages: ‘There is the pass-through of cheques to the beneficiaries – preferably at regular times so that the beneficiaries are assured of a regular and predictable stream of income, which might be of immense importance to the beneficiary, especially if the beneficiary has lack of adequate financial management skills.
They can further provide a steady income for meeting the survivors’ daily needs of the survivors, including feeding, expenses on shelter, and health care, which make for an inheritance to beneficiaries.
Also, annuities do not go through the process of probate, which aids in the heirs receiving the funds within a short duration and, therefore, avoids the extra costs of hiring a lawyer.
This can be especially beneficial since it will allow everyone to bypass the commonly painful and expensive process of probating an estate,’ says Sarah Jeffries, Director of Paediatric First Aid.
In addition, some annuities include death benefits provisions, which means the balance will be paid to the rightful beneficiaries. These benefits can be designed to be spent in a lump sum or regular annuity payments based on the named beneficiaries’ preferences.
4. Tax Considerations
There are many different tax considerations regarding annuities, which are essential in estate planning. ‘Even though the money invested in the annuity can grow without the interjection of taxes, the amounts received by beneficiaries could be considered taxable.
For example, if the annuity is non-qualified, only the part of the receipts exceeding the principal is taxable. In contrast, the principal is deemed to be returned to the investor tax-exempt. The type of annuities, the qualified, which are funded with pre-tax dollars, is fully taxable when distributed.
Thus, it is necessary to comprehend the tax treatment of various annuities and how they can be brought into one’s estate planning properly to reduce the tax impact on the beneficiaries,’ says Sam Hodgson, Head of Editorial at ISA.co.uk. It is advised to seek the services of a tax advisor to assist in identifying these complicated issues and find ways of minimizing them.
5. Annuities and Probate Avoidance
Another merit of using annuities, especially in planning estates, is that the assets invested are not subjected to probate. ‘Probate is a legal procedure where the deceased person’s assets are divided, often taking so long and financially demanding.
In this way, beneficiaries can be named on an annuity contract, which means the money can be passed on to them without going through the probate process; this is fast and effective. This direct transfer can also retain the privacy of the estate because probabilities are public records.
Exempting a part of the funds from being subjected to probate litigation enables the heirs to access the money much faster since they may need it to pay bills that arise due to the loss of the deceased.’ says Corey Longhurst, Head of Growth at LegalOn
6. Structuring Annuities for Heirs
‘When planning for the estate, it is wise to have them appropriately prepared to satisfy everyone back at home. It also involves the selection of a payout schedule that is either a lump sum or installments and the age and financial status of the beneficiaries.
For example, younger clients would find it suitable to receive occasional or annual installments since they will receive this type of payment periodically and consistently within a certain period,’ says Gerrid Smith, Founder & CEO of Fortress Growth.
On the other hand, the old client prefers a one-shot payment, which you can pay their hospital bill, buy a car or a house, and other things they need immediately. Structuring of the annuity is made specific in a way that benefits most or all the heirs.
7. Integrating Annuities with Other Estate Planning Tools
‘Estate planning is the best way to determine the role of annuities in wealth management. They can be combined with other plans like trusts, wills, and life insurance to develop a comprehensive plan that deals with all the aspects of your financial planning.
For instance, a trust can be created to hold and distribute the annuity payments based on specific provisions; this releases more as an added form of control and protection to the beneficiaries.
Annuities can be combined with life insurance when the former’s regular payouts are insufficient to pay off estate taxes or other pressing costs at the time of death,’ says Ben Flynn, Manager at Homefield IT.
You should consult with a financial advisor or an estate planning attorney to assist you in understanding all the nuances and guarantee the proper integration of all elements of your strategy.
8. Potential Drawbacks
To be sure, annuities provide many advantages but also have their downsides. ‘Compared to other policies, the cost of annuities could be pretty high, including administration fees, mortality, expense risk fees, and investment management fees.
These costs can cut into the returns and limit the gains from the annuity. There may also be penalties for early withdrawal, which, in a way, constrains flexibility in case the money is needed at other times.
Also, there is the cost factor, total expenses, and the insurance company’s capacity to issue an annuity contract, as payment stability depends on that company,’ says Gemma Hughes, Global Marketing Manager at iGrafx. Having this knowledge to make decisions and ensure that the chosen annuity benefits the estate plan is helpful.
Conclusion
Among the benefits of annuities for tested estate planning are the guaranteed regular income to the beneficiaries, non-probate transfer, and tax savings. But, it is essential to specify the varieties of the annuities, their characteristics, and the possible negative aspects, including taxation.
With the use of annuities, there are other estate planning instruments that, together with the help of financial advisors, one can develop a slate that will guide the administration of one’s financial affairs and assets in the event of one’s death.
Done right, they are precisely what their name implies: an anniversary, a guarantee of a financially secure future for your loved ones in light of your passing.