In this Section:

Using Annuities for Responsible Wealth Transfer

Most clients are conscientious about how their wealth is allocated, and they want to be as thoughtful about bequeathing that wealth to a loved one.

But have they really thought through their intentions? Have they taken steps to make sure their objectives are carried out? Leaving large sums of money to an heir, even with the best of intentions, can have unintended and sometimes disastrous financial consequences.

Setting Up a Fixed Annuity as a Wealth Transfer Strategy
Transferring a large sum of money to a loved one may seem straightforward, but there are a number of considerations clients should contemplate when doing so. In particular, they should ensure that by transferring funds, they’re not creating an undue tax burden for an heir.

The tax bill associated with a large transfer potentially could eat up a significant portion of an inheritance and leave a beneficiary with more problems than the client intended.  

A tool to help clients pass along their wealth responsibly may be the vehicle they used to accrue their wealth: a fixed annuity. Although annuities typically are seen as a means to grow assets and distribute them during retirement, a fixed annuity is also a sound option for transferring assets.

Not only does this take only a slight restructuring of the annuity’s payout, but it also can create a well-thought-out plan for how the beneficiary uses the proceeds.  The key is ensuring the beneficiary designation aligns with your client’s wishes.  

Naming a Beneficiary Might Not Be as Simple as It Seems
To many clients, the beneficiary designation might seem like one of the most straightforward requirements of purchasing an annuity. However, it is important to discuss beneficiary designations with your clients and review them periodically.

We have all heard stories in which a beneficiary designation in place at the time of a client’s death was not what he or she had intended, leaving large sums of money in the wrong – or possibly unprepared – hands.

These questions can help you guide clients through these considerations:

» Are all the deferred annuity death benefits going to the desired people? Clients often don’t think about updating their beneficiary designation after life’s major events. A lot can happen from the time a plan was enacted to the next time that plan is reviewed. For example, Mrs. John Smith may not be the current Mrs. John Smith, due to divorce or remarriage.

During the periodic review, it is also important to determine whether the designation percentages are accurate and whether the payout strategy for disbursing proceeds still is the most prudent for each beneficiary.

» Have worst-case contingencies been considered and covered? It is important to do more than designate only a primary beneficiary. Help your clients understand the importance of designating contingent beneficiaries as well. When clients fail to include this information, they risk having the proceeds go to their estate, perhaps entangling beneficiaries in a long legal process. This probably is not what the client would have wanted.

» Do current deferred annuity products continue to meet the client’s needs? For many clients, it might be time to start thinking about annuities as a way to transfer assets instead of annuities as a tool to fund retirement. By helping clients revisit their financial plans and changing the purpose of an annuity, you can help them meet new goals. This can help clients not only manage assets but ultimately transfer those assets to beneficiaries as part of an orderly, planned wealth disbursement.  

» Is your client’s financial plan inadvertently creating a tax burden for the beneficiary? As mentioned above, when paid in a lump sum, the payment stream from an annuity potentially can create a tax burden for beneficiaries. Do your clients know how proceeds from an annuity will affect the heir? Will it push the heir into a higher tax bracket? That could eat up large portions of an inheritance.  

» Do current products allow your client to predetermine how proceeds will be distributed to the beneficiary? Choosing the terms of the payout can reduce the tax burden to the beneficiary. Payments can be spread throughout the beneficiary’s lifetime. Some beneficiaries might prefer a steady stream of payments, while others might want a lump sum. Each scenario has important lifestyle and tax considerations.

Annuities with restrictive endorsements provide an opportunity for a purchaser to determine how proceeds are disbursed. A restrictive endorsement gives the purchaser “control from the grave,” taking the decision-making out of the hands of beneficiaries, who might not be ready for the responsibility, and putting it into the hands of the purchaser. The use of this endorsement can be a powerful tool that provides clients with peace of mind knowing the proceeds from the annuity will be disbursed in the way the purchaser intended.

For example, one of the advisors I work with recently assisted a grandmother who wanted to gift money to her grandchildren. The advisor wrote a restricted single premium immediate annuity (SPIA) with a five-year income stream instead of lump-sum payments. The grandmother was interested in this approach because she was worried her grandchildren would spend the entire payment if they received it all at once. Not only did this spread out the tax burden to her grandchildren, she liked the idea that her grandchildren would receive a monthly check from her after she was gone.

By advising your clients to think about these questions, you’re helping them take comfort and pride in their legacies. You’re demonstrating that fulfilling their wishes is important to you. That builds trust and helps build business.


Rich Lane is the director of individual annuity sales and marketing for Standard Insurance Co. He has been in the fixed annuities industry for more than 17 years, with an emphasis on product and distribution development for brokerages, banks and broker/dealers. Rich may be reached at [email protected] .

More from InsuranceNewsNet