Annuity Maximization

Situation:

  1. You have a client who originally purchased a deferred annuity and no longer needs the annuity for retirement income purposes
  2. Your client is more concerned with leaving a legacy to heirs
  3. Although a deferred annuity is a good vehicle for accumulating funds for retirement, it is not an efficient vehicle to transfer wealth
  4. Assets can become taxed twice at death; by income taxes in respect of a decedent (IRD taxes) and by estate taxes

Solution:

Your client can reposition, or maximize, the deferred annuity by exchanging or converting it to a Single Premium Immediate Annuity (SPIA). A SPIA provides an income stream for life based on a single deposit made to purchase the annuity, and your client’s age and health status. Your client can make gifts of the after-tax SPIA income to the ILIT. In turn, the ILIT uses those funds to purchase a life insurance policy on your client’s life for an amount that replaces or exceeds the value of the deferred annuity, to benefit heirs. Alternatively, the client may keep the deferred annuity and simply make withdrawals from it; however, these withdrawals may be subject to surrender charges or penalty taxes if taken prior to age 59 ½.

Benefits:

  1. Removes assets from taxable estate
  2. Increases legacy to heirs

Considerations:

  1. Client must stay below annual exclusion gift and lifetime exclusion thresholds to avoid gift tax
  2. Clients who have not yet reached age 59 ½ will generally be subject to a 10% IRS penalty on any withdrawals they take