At first glance, annuities may not appear to have any relevance to estate planning. However, annuities-mainly by virtue of their estate-liquidating feature- have a significant impact on estate planning. As a result, an annuity can either help or hurt estate-planning efforts. Once you own annuities or plan to purchase them, you should consider the effect they have on your estate- particularly where your estate value is concerned.

Three features of annuities make them vital to estate planning: the estate-liquidating function, estate transfer feature and their tax treatment. Annuities have the effect of reducing the value of your estate when they mature. Before maturity, the total value of an annuity constitutes part of the total estate-value. Tax exemption offered on annuities offer another avenue for your beneficiaries.

Estate liquidation

At the commencement of the annuity payout phase, the annuity provider uses accumulated fund or lump sum to purchase a Single Premium Immediate Annuity. The conversion of that accumulated fund to purchase a guaranteed income essentially liquidates that portion of your estate. When you take your own funds to purchase an immediate annuity, you virtually give your money to the insurer in exchange for reduced payments.

That purchase of a SPIA at maturity or an immediate annuity directly reduces the value of your estate. The estate-liquidating feature of annuities can work against you if you desire to leave a sizeable estate for beneficiaries. However, if you want do not want your estate to exceed a certain value (usually for tax purposes), annuities (immediate annuities in particular) are very useful. Either way, annuities are vital to your estate value.

Estate transfer

Annuities in their payout phase have optional survivor options that can provide for beneficiaries dependent on your annuity income. Even in the accumulation phase of deferred annuities, insurers or annuity providers offer the option of stating beneficiaries- to whom the proceeds of the annuity plans would be disbursed. The estate transfer mechanism facilitates the seamless transfer of funds to beneficiaries, which is useful in the absence of a will.

Tax treatment

Some states and countries stipulate that estates below a certain value are tax-exempt. One can utilize the estate-liquidating function of annuities to maintain the value of your estate within the tax-exempt threshold. For deferred annuities, the death benefit in the accumulation phase may or may not be subject to taxation. In cases where estate taxes are applied to the death benefit, this must be included in the total tax burden of your estate. Once an annuity reaches the payout phase and there is a survivor benefit (lump sum or annuity payment), this is normally exempt from taxation.

Laws and regulations governing annuities and estates differ among states and countries. Regardless of how annuities and estates are treated, there exists an important link between the annuities and estate planning. The only way annuities are not vital to estate planning is if you do not own one. Otherwise, it is important to consider the effect of annuities on your estate value and estate tax- treatment.

Learn more about this author, Darrell Victor.
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