Annuity Uses and Strategies

WHEN BUYING A FIXED RATE ANNUITY. BUY ONE THAT LOCKS IN A SET RATE FOR THE ENTIRE DURATION.

Many fixed annuities offer a set rate locked in for the same duration as the penalty for early withdrawal. Hartford Life has a large selection of these types of plans. They offer everything from a 10-year locked in guaranteed rate policy all the way down to a 1-year policy. Just like a CD, the longer the plan you choose, the higher the locked-in rate will be. Click here for more.

LOOK AT A CHARITABLE REMAINDER ANNUITY TRUST RATHER THAN A UNITRUST.

One powerful financial planning tool used today with increasing frequency is the Charitable Remainder Trust (CRT). It allows donors to provide for their own financial security while setting in motion a legacy gift to a chosen charitable organization.

This financial planning vehicle allows you to place assets in trust. You can qualify for a current tax deduction when you fund the trust. Trust assets can provide a stream of income to you and/or your named beneficiary(ies) for a set time period or for life. After this, the remaining trust assets go to the charitable organization(s) you named. Since the trust is not part of your estate, trust assets are not subject to estate taxes.

A CRT can be a unitrust or an annuity trust. In the case of a Charitable Remainder Unitrust, a fixed percentage of value of the trust assets is distributed to the donors. The assets are valued annually. If the value of the assets in the trust increases/decreases, the amount of income will change since the same fixed percentage amount is paid to the donor(s).

A Charitable Remainder Annuity Trust is similar to the unitrust, but provides a fixed dollar amount year after year. Any increase/decrease in the value of the trust does not affect the payments. Variable Annuities can be a solid choice for funding CRT's.

CONSIDER VARIABLE IMMEDIATE ANNUITIES FOR INCOME.

Immediate annuities are used for generating income. You deposit a fixed dollar amount and receive a guaranteed income stream for a variety of different time frames including the rest of both your and your spouse's life if you wish. Most of these annuities credit around 3% to the cash values remaining in the annuity while you receive the income. If your time frame is 10 years or longer, look at a variable immediate annuity. Because you're working with a longer time frame you can account for the market swings and receive a larger pay out. Be sure to stick with a moderate investment portfolio like Growth and Income or Index Funds.

USE 2 DIFFERENT PLANS FOR A SPLIT ANNUITY.

Split annuities divide your money into two portions. One portion is set aside and left to grow back to your original total deposit amount. The other side is set up to pay you an income stream during the same time frame. This type of plan is designed to give you current income and preserve your original deposit amount. Rather than buying one split annuity policy from one company, find the company with the most competitive pay out and then the best company for letting the other portion grow. Most companies will focus on being strong in one area or another. Rarely will the same company offer the most competitive product in both areas.

IF YOU HAVE A LARGE IRA THAT'S GOING TO BE PASSED ON TO YOUR HEIRS, DO SOME ESTATE PLANNING TO AVOID THE HIGH TAXES.

This gets into some advanced Estate Planning, but everyday people pass away with large IRA's that their heirs are going to end up paying huge amounts of taxes on. In many cases, by the time everything is said and done the heirs receive less than 20% of the total IRA value. If you own an IRA with $220,000.00 in it, left in your estate, your heirs could end up with less than 45,000.00, with the rest going to taxes. Because of the amount of wealth transfer we are starting to see in this country, this is a strategy that needs to be mentioned. Most brokers have never learned these kinds of techniques and they can turn a huge taxable event into an amazingly powerful wealth transfer vehicle.

Let's use the above situation as an example. Transfer the IRA into an Immediate Life Only Annuity. Note that this is an annuity designed to generate income and not for taking advantage of tax-deferred growth. A life only annuity will generate the highest pay-out option available because whenever you die, the insurance company stops making all payments. If you died 3 months after placing the IRA in this type of annuity, the insurance company comes out smelling like a rose because they keep the balance. But keep in mind that the payments are larger because of this and they still base them on your life expectancy. Let's say that the payments are $25,000.00 per year. You pay your income tax of say 28% and have $18,000.00 left. Use the $18,000.00 to purchase a life insurance policy with a Death Benefit of say $375,000.00. All of these figures will depend on your age and health. You need to have a child or an Irrevocable Insurance Trust own the policy to get the ownership outside of your estate. Now let's look at what we have. Because the annuity that you transferred your IRA into is worthless at your death, you have reduced your taxable estate by the $225,000.00 instantly when you purchase the Immediate Annuity. By using the income to pay for a life insurance policy owned outside your estate, your heirs would receive the policy Death Benefit of $375,000.00 100% income and estate tax free. That's about $330,000.00 more than they would have seen and $150,000.00 more than the IRA was worth to you at $225,000.00.

Let us know if you need any help or have any questions regarding these or any other investment strategies.