Annuities and estate planning

By SarahB

ProducersWeb Marketing


I recently discussed the usage of annuities in estate planning with Jason Ryan, founder/president of Optimum Wealth. To see an archive of Ryan's articles, visit his profile here.

Sarah B (SB): In terms of annuities, how are these savings vehicles typically used in retirement and estate planning?
Jason Ryan (JR): Annuities have always been used for retirement planning. In fact, in 1952 the first variable annuity in America was designed and developed specifically for a qualified plan for education employees (College Retirement Education Fund — CREF). Also, annuities are the only investment vehicle that can provide a guaranteed income stream that you can never outlive, and a guaranteed death benefit that will return all of the individuals original investment should they die prematurely- regardless of market conditions. In addition, the new guaranteed living benefit riders help to make annuities an even more powerful tool for retirement planning. So, whether a client is in the accumulation stage or the distribution stage of retirement, an annuity may be a great fit.

Typically, most advisors have shied away from annuities when it comes to estate planning. Not because of the product itself, but rather because of the way the annuity is taxed. According to IRS section 72(u), if an annuity is owned by a non-natural entity then it will lose the benefit of taxed deferred growth. (taxes will be due every year on any gains in the contract). However, there have numerous private letter rulings from the IRS that provide exceptions for trust owned annuities ( there must be a human being that can ultimately be identified as the beneficial owner of the trust). Also, since income taxes must be paid on the growth by the beneficiaries after receipt of an annuity death benefit (no step up in cost basis), many advisors generalize that annuities must be a poor choice for funding an estate plan. As you saw from my article, this is not necessarily the case. There are some estate planning strategies in which an annuity can be a perfect fit.

Again, with the new guaranteed living benefit riders, we are starting to see increased client and advisor interest in using annuities with these enhanced benefits for legacy planning.

SB: Do you think annuities are safe retirement savings vehicles?were created by state legislatures to protect life, annuity and health insurance policyholders and beneficiaries of an insolvent insurance company. All insurance companies licensed to write life or health insurance or annuities in a state are required, as a condition of doing business in the state, to be members of the guaranty association. Every state (plus Puerto Rico) provides $100,000 in withdrawal and guaranteed cash values for annuities. (Naturally, they do not cover any portion of a policy in which investment risk is borne by the individual, such as a variable annuity.) If you need it, a great resource is the National Organization of Life & Health Insurance Guaranty Association- www.nolhga.com
JR: Annuities are only as safe as the insurance company that stands behind them, but to answer your question — yes, I feel annuities are a very safe retirement vehicle. What makes them relatively safe are the state guaranty associations. These


Also, as I stated above, they have some great guarantees that are very unique to annuities (death benefit, income you can never outlive, etc). Plus, with the addition of the new living benefit riders, a client can sleep well at night knowing that their future retirement income is protected.

SB: Is there another product you’d recommend over the annuity when it comes to estate and retirement planning?
JR: There really is not a perfect product when it comes to retirement and estate planning. It truly depends on the client and their goals. The problem for most advisors is that they often become too attached to a single financial product or solution. And it then ultimately clouds their thinking. It is like the old saying, "When your only solution is a hammer, every problem starts to look like a nail." For some advisors, annuities are their hammer. They position an annuity as a one size fits all financial solution to any and all problems. Again, there is nothing wrong with annuities, and it may very well be the best solution. However, advisors need to dig deeper into their toolbox and utilize all of the financial tools that are available to them. Don't let the financial product dictate the solution.