Educate Your Clients on Annuities as a Wealth Transfer Tool

As a financial producer, you’re aware that one of the main concerns of your clients is how to efficiently and responsibly pass on their wealth, whether it’s to younger siblings, children or even grandchildren.

While there are numerous ways your clients can leave inheritances, certain methods create more burdens than your clients would prefer. For instance, a lump sum often creates harsh tax implications that your clients’ heirs then have to deal with. Additionally, a lump sum without any spending restrictions can be used quickly and not help family members throughout their lives, as your clients likely intended for it to. Instead of leaving a large sum as an inheritance, you can advise your clients of a more beneficial and structured method: a deferred annuity.

Looking at annuities in a new light

In most cases, your clients will have heard of annuities as a means to manage finances and retirement income, not as a wealth transfer tool. But, as long as the primary and contingent beneficiaries of an annuity are who the client wishes, it can act as a well-structured inheritance, paying out only after your client’s death.

Benefits of a fixed annuity

Two major benefits of using annuities as a wealth transfer method are that your clients can design exactly who receives funds and how the proceeds will be disbursed. An annuity can be set up with one beneficiary or more, as well as with contingent beneficiaries in case an heir is no longer living when the annuity becomes active.

If your client has three children, all of whom have children of their own, he or she can design the annuity to provide income to all three children. In the situation where a child has passed before the annuity begins to pay proceeds, that child’s children could be named the contingent beneficiaries and receive that person’s share of the inheritance.

This is just one example you can provide to your clients to illustrate the flexibility in assigning inheritances.

Annuities not only allow your clients to determine who receives an inheritance, but how. Proceeds can be paid throughout beneficiaries’ lifetimes or in larger sums for a shorter period of time. The ability to customize how the annuity will pay out is important as your clients can manage the tax burden on their heirs and reduce the likelihood of the inheritance being used irresponsibly.

You can even advise your clients regarding the possibility of using a restrictive endorsement with an annuity, ensuring their control over the sum isn’t lost. Under a restrictive endorsement, the beneficiary is unable to sell or assign his or her rights to the annuity, ensuring he or she can’t receive a lump sum in place of timely disbursements.

Using an annuity as a wealth transfer tool offers your clients control and flexibility. In addition to these qualities, which are lacking in lump sum inheritances, an annuity helps your clients protect their families years into the future, ensuring they have the income they need with fewer tax consequences.

Editor’s Note: This post was originally published in April 2015 and has been reviewed and updated.

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