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Annuities in Estate Planning: 5 Ways to Use Annuities for Estate Planning

An annuity is a financial tool that provides guaranteed, regular payments to a recipient. Learn why including one in your Estate Plan may be a great option for you!

When it comes to Estate Planning, there are a lot of good options. But which options are the best ones for you and your loved ones? How you plan for your Estate to be managed – both during your life and after you’re gone – can depend on a lot of personal factors. Ensuring that you have an Estate Plan in place, however, can make all the difference when it’s time for some important decisions to be made. 

Estate Planning is more than making a Will and putting your final wishes down in writing (although, that is an important part of the process.) It is also a way to safeguard the financial future of your heirs. The money, property, and other valuables you’ve worked for in life – what happens to them when you’re no longer here? Will they be looked after diligently? Will they be handled sensibly and grow? Will they disappear? That can depend on how you set up your Estate Plan. 

It’s not always the easiest thing to talk about, but something will have to happen to your belongings, your property, your bank accounts, your jewelry, and any other assets you have after you die. If you own anything that you want to leave to a family member, friend, charity or other organization, taking the steps to create an Estate Plan can make that happen. And when you’re making an Estate Plan, including Annuities for an heir or heirs may be an option you’ll want to consider. 

What is an Annuity?

An Annuity is a financial tool that provides guaranteed, regular payments to a recipient. An Annuity is purchased for a certain amount and then in return, delivers a fixed stream of income – a certain amount of money paid out at regular intervals, often monthly – over a number of years or even a person’s entire lifetime. 

The amount an annuity will pay out each month depends on a few things: the amount the annuity was purchased for, the age of the person receiving the annuity, when the annuity payments start, and the type of annuity that is used. 

How Annuities Work in Estate Planning

Annuities are used for several reasons, often to manage a sum of money, provide regular income, or help fund retirement. Instead of leaving a six-figure sum in a savings account, for example, a person may choose to use that money to set up an Annuity and then get monthly payments from that annuity and the interest it generates. Annuities can be set up so that the payments can be put into a savings account, directly used to make mortgage payments, or to pay for insurance and other necessities. 

An Annuity is a way of controlling how money is used, and how much of it is made available to a person. Though it’s not the first thing that comes to mind when you think of an Estate Plan, an Annuity can be used very effectively in Estate Planning. 

If someone inherits a sum of money, you can’t always guarantee how that will go for them. While some people are cautious with their finances, others love nothing more than spending money as fast as it comes in. Some people can be responsible and practical with money, some can fall prey to schemes and opportunists. No two instances are the same, and Annuities can be complex. But if you think providing a regular monthly payment instead of a lump-sum of inheritance to an heir may be the wiser option, or you want to control what some or all of a person’s inheritance is used for, an Annuity may be the solution. 

Reasons to Include Annuities in Your Estate Plan

There are different types of annuities, and there are plenty of benefits to using them to distribute and manage wealth. Five reasons Annuities might be included as part of an Estate Planning strategy include: 

1. Annuities can provide guaranteed income

Inheriting a certain amount of money all at once can provide one sort of financial security, but knowing that you will have guaranteed income every month is a different type of security. You know your family and loved ones. You know who among them might have a hard time budgeting. If you want to ensure the financial stability of an heir – or perhaps see to it that the money you leave isn’t burned through irresponsibly after a few years – an Annuity can be created to provide monthly payments to that person for a longer period of time. Annuities allow you to create some degree of financial stability and security for a beneficiary through the income they provide. 

2. Annuities can grow principal while minimizing risk

Principal is the amount of money someone is initially given in an account, through inheritance such as a Trust or – in this case – in an Annuity. It’s what they start out with. That money can increase (often through investment profits and interest payments), and it can decrease (through spending, taxes, fees, and investment losses). Ideally, the principal will increase more than it decreases. Annuities – with fixed or variable investment options, have the potential to grow or maintain principal while being less risky than some other investment options. And while Annuities do come with some fees, they are often seen as a more stable investment as they are backed by an Annuity provider and not subject to the ups and downs of market rates. 

3. Annuities can let heirs avoid hefty Tax payouts

Annuities can be used to transfer wealth or services afforded by that wealth while minimizing taxes owed on the money. For instance, certain assets such as Roth IRA Accounts can be put into an Annuity, which can free them from Estate taxes and income taxes. Annuities payments can be used to purchase insurance plans for a beneficiary, in effect transferring some wealth to them without it being taxed. A charitable gift annuity can also be created to give an amount of money to a charity while providing a tax write-off. 

4. Annuities can help bypass Probate court and other delays

When someone dies without a Will or other Estate Planning measures in place, or when there are questions about how their Estate should be handled, the Estate can end up in Probate court. That means it can take months before any inheritance matters are settled, and the heirs may then owe court fees, attorney costs, and other inheritance costs. Plus, the bickering and all-out-fighting some families may go through disputing how assets are distributed can be damaging to everyone involved.  

5. Annuities can be less expensive than Trusts

Annuities aren’t the only way to bequeath money to heirs, and there are other good Estate Planning options, like Trusts, that can also be used to transfer wealth and manage how an inheritance is doled out. But sometimes Trusts may be more expensive to set up or manage, or paying a Trustee or Trust management company to administer the Trust may not be necessary. A good Estate Planning service can help you make the best decision for your personal wealth, including whether you should create an Annuity or a Trust. 

Estate Planning Now vs. Later

If you’re wondering when you should make your Estate Plan, it may be time to get started. Planning for the financial future of your loved ones can never start too early. 

Is there a question here we didn’t answer? Reach out to us today or chat with a live member support representative!