How to generate extra income from your annuity to fund your Estate Plan

April 09, 2024

How to generate extra income from your annuity to fund your Estate Plan 

If you have an annuity, you no longer need, consider these five ways to deploy the extra income in your estate plan.

These strategies offer different ways to leverage the extra income from an annuity in your estate plan, providing opportunities to reduce taxes, support loved ones, and contribute to charitable causes.

  1. Surrender for a Lump Sum:

    • Evaluate Surrender Charges:
    Before surrendering the annuity, review the surrender charges outlined in the contract. Surrender charges typically decrease over time, so it's essential to determine if you're within the surrender period and if any charges apply.

    •Tax Considerations: Withdrawals from the annuity may be subject to ordinary income tax, particularly if there are earnings on the annuity. Consider consulting with a tax professional to understand the tax implications of surrendering the annuity.

    • Reinvestment Options:
    Once you've received the lump sum, explore opportunities for reinvesting the funds in other assets or investment vehicles that align with your estate planning goals and risk tolerance.
  1. Transfer Ownership to a Trust:

    • Establish an Irrevocable Trust: Work with an experienced estate planning attorney to establish an irrevocable trust to receive ownership of the annuity. An irrevocable trust removes the annuity from your taxable estate and provides asset protection benefits.

    • Trustee Selection: Choose a trustee who will manage the annuity and distribute funds to beneficiaries according to the terms of the trust. Consider selecting a trustee who has experience with trust administration and fiduciary responsibilities.

    • Trust Funding: Ensure that the trust is properly funded with the annuity contract, and update beneficiary designations accordingly. Regularly review the trust and annuity contract to ensure they align with your estate planning objectives.
  1. Make Annual Gifts to Heirs:

    • Utilize Gift Tax Exclusion: Leverage the annual gift tax exclusion to transfer wealth to your heirs tax-free. Determine the maximum allowable gift amount per recipient based on current IRS regulations.

    • Gift Timing: Strategically time the annual gifts to coincide with the annuity income distribution schedule. Consider factors such as cash flow needs, recipient preferences, and tax planning considerations.

    • Gift Documentation: Maintain accurate records of the annual gifts, including gift amounts, recipients, and dates of transfer. Consider consulting with a tax professional to ensure compliance with gift tax reporting requirements.
  1. Purchase Life Insurance:

    • Evaluate Insurance Needs: Assess your life insurance needs based on your overall estate planning goals, financial situation, and beneficiaries' needs. Consider factors such as coverage amount, policy type, and premium affordability.

    • Compare Insurance Policies: Research and compare different life insurance policies offered by reputable insurance carriers. Consider working with a licensed insurance agent who can provide personalized recommendations based on your unique circumstances.

    • Policy Ownership and Beneficiary Designations: Determine whether you will own the life insurance policy personally or through a trust. Review and update beneficiary designations to ensure they align with your estate planning objectives.
  1. Support Philanthropic Endeavors:

    • Identify Charitable Causes: Determine which charitable organizations or causes align with your philanthropic values and priorities. Research charities' missions, financial transparency, and impact to ensure they meet your criteria for charitable giving.

    • Establish Charitable Giving Vehicles:
    Explore different charitable giving vehicles, such as donor-advised funds, charitable remainder trusts, or charitable lead trusts. Consult with a financial advisor or philanthropy expert to determine the most suitable option for your charitable goals.

    Maximize Tax Benefits: Leverage available tax incentives for charitable giving, such as income tax deductions for charitable contributions and capital gains tax savings on appreciated assets. Consider consulting with a tax professional to optimize tax-efficient charitable giving strategies.

In summary, each of these strategies offers unique opportunities to deploy the extra income from an annuity in your estate plan. Whether you choose to surrender the annuity, transfer ownership to a trust, make gifts to heirs, purchase life insurance, or support charitable endeavors, it's essential to carefully evaluate your options and consult with qualified professionals to develop a comprehensive estate plan that meets your objectives and maximizes the benefits for your heirs and beneficiaries.