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Creating a Wealth Transfer for Loved Ones

wealth transfer strategies

At some point or another, you may have heard of the “Great Wealth Transfer.” The baby boomer generation will be leaving trillions of dollars to their heirs over the next 30 years.

IRAs, qualified employer retirement plans, taxable investment accounts, annuities, and life insurance will be among the numerous assets that provide a legacy for generations to come.

Depending on the situation, some methods of wealth transfer may be more advantageous than others. People who work with advisors specializing in legacy planning strategies can save a great deal of time, confusion, and money in figuring out what makes sense for their goals.

Strategic guidance from their financial professional, in conjunction with high-quality estate planning legal counsel, can help ensure the smooth transition of their wealth to their heirs. 

What Are Some Starting Points for Legacy Planning?

There are many factors to consider in legacy strategies and estate planning. One of the first considerations is whether someone’s children are capable of handling money themselves.

What if they aren’t of legal age or are spendthrifts? Then an attorney can help you determine if a revocable living trust or something else may be needed in order to specify when and how money may be distributed to the beneficiaries.

For example, the trust may stipulate that the beneficiary receives a third of the money in the trust when they are 25 years old, another third when they are 30, and the rest of the money at 35.

That timeline would give them some time to ‘grow up’ while still providing a measure of financial support. 

Marriage and divorce are other key elements of estate planning. In many cases, it’s not uncommon to see someone married to their second spouse while the ex-spouse and kids are still living together.

In scenarios like these, your attorney can help you determine if trust options, such as a Qualified Terminal Interest of Property (QTIP) trust, can be used to make sure that the client’s children from the first marriage don’t lose their share of the inheritance. 

Don’t Forget About Taxes

Estate taxes can also loom for wealthy clients. People who hold large blocks of stock in a closely-held business will need to know how to most effectively pass them on to heirs without triggering a tax bill for the estate.

Your financial professional and your attorney can help you explore your options like a second-to-die life insurance trust or charitable donations. 

Should You Consider Annuities for Wealth Transfer Goals?

Your financial advisor can help you explore different options that make sense for your wealth transfer goals. An annuity may be worthwhile to count among the possible vehicles that you investigate.

With its sturdy contractual guarantees, an annuity can pay your heirs a guaranteed death benefit once you are no longer here. What if you want to leave a larger legacy than what is in the annuity contract?

Then some annuities will provide an enhanced guaranteed death benefit that is a multiple on that value. Some annuity contracts with an enhanced benefit rider can increase the death benefit amount that the heirs would normally receive by 30%.

In some variable annuities, some death benefits will even pay the beneficiary the highest value that the annuity ever reached in its duration. Other annuity contracts may have similar enhanced benefits that are available. Your financial professional can walk you through these possibilities.

Of course, this form of protection comes at a cost. That being said, it can provide peace of mind for both the annuity owner and their beneficiaries.

An Alternative if Life Insurance Isn’t an Option

Using an annuity to deliver a guaranteed death benefit can be especially attractive for those who can’t meet the medical underwriting requirements for a life insurance policy. 

What might be some situations that might exclude someone from approval in the underwriting process? At a high level, those situations can include:

  • Poor health
  • Bad smoking habits or drinking habits
  • Risky occupation or lifestyle (e.g., you work on construction sites with an elevated risk to make your living)
  • Unfavorable personal medical history
  • Unfavorable family history

This is by no means an exhaustive list, but they are a few situations in which someone might not obtain approval from the life insurance company.

Annuities are one way that you can pass along a guaranteed death benefit to your loved ones if you aren’t able to obtain adequate life insurance coverage due to personal or health complications.

What Are Some Other Advantages of Annuities?

Annuities can also keep money in a dependable place with contractual guarantees for protection, so there is a very good chance that you will keep the money you put in.

Fixed-type annuities are well-known for this and keep your money under lock-and-key. Fixed indexed annuities also guarantee the annuitant’s principal.

However, the interest rate that a fixed index annuity earns tends to vary. But indexed annuities have usually had higher growth over time than fixed annuities, so the reward is usually worth the risk. 

Unique Protections

Another key advantage that annuities provide is that they are usually exempt from probate. The probate process can be expensive (due to court costs and creditor claims), it can dredge up family conflicts that are financially and emotionally demanding, and probate proceedings are also very public.

Anyone can log on to the probate court website in order to see exactly what someone has in their estate. But annuities don’t have to be placed inside a trust, qualified plan, or IRA of any kind in order to avoid probate.

In this regard, annuities stand out as one of the few instruments that are inherently exempt from the probate process.

Annuities also generally have protection against creditors in many cases. Although the laws concerning this vary somewhat from one state to another, annuities are difficult assets for creditors to attach.

Many people have heard of how O.J. Simpson was living off of money that he had in annuities after he lost the civil court case proceedings (at least, before he went to prison).

Annuities that are placed inside an IRA or qualified plan have protections from creditors in various situations. But non-qualified annuities enjoy a large measure of this protection as well. 

What About Tax Treatment for the Death Benefit?

Some types of assets, such as stocks and bonds, have a cost basis that will automatically step up when they are passed to the heirs. This can substantially lower the tax bill the heirs will have to pay and allow them to liquidate these assets immediately if they need to.

Other types of assets such as annuities don’t have a step-up in basis when they are passed to heirs. So, annuities generally won’t have the same kind of tax advantage in this regard as assets like stocks and bonds. However, non-qualified annuities still allow for payments to the beneficiary to be made over the beneficiary’s lifetime.

One disadvantage that annuities have is that they aren’t privy to capital gains treatment. The income that is drawn out of an annuity is taxed as ordinary income, meaning that the income will be taxed at the beneficiary’s top marginal tax bracket.

Exceptions to the (Tax) Rules

The exceptions to this are when a portion of the principal that was invested in the annuity is withdrawn, and this amount is considered to be a tax-free return of principal.

Generally speaking, you will see this happen with an immediate annuity that has non-qualified money (in other words, after-tax dollars), meaning an exclusion ratio will be used to determine what is taxable.

Then, of course, any withdrawals from an annuity that is held inside a Roth IRA are never taxable. That is, unless the account owner is below the age of 59 .5 and no qualified exception applies.

If this is the case, then the withdrawal will be taxed as ordinary income and a 10% early withdrawal penalty will be assessed. 

Working Through Your Options for Your Legacy Goals

Annuities are fundamentally unique vehicles in the world of finance and estate planning. Their exemption from probate and creditors, along with their tax deferral for growth, make them attractive options for mature-aged individuals seeking an efficient way to pass on some of their assets.

If you have money that you want to leave to heirs and you are looking for a place that will keep those dollars protected and secure, you might well want to look at an annuity among the options that you explore. Your financial professional can discuss your situation in detail, explain the pros and cons of this vehicle, and help you determine what choices might be right for your goals.

Consult your financial advisor for more information about annuities and how they can benefit you and your heirs. If you are looking for a financial professional to assist you, many independent financial professionals are available at SafeMoney.com via just a few clicks of the mouse.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.

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