In reviewing assets, an estate owner may find that a deferred annuity purchased years ago has grown substantially but will not be needed for income during the owner’s retirement years.
Individuals or couples who own a deferred annuity, intended as a gift for their children, may be disappointed when they find out how substantial the tax burden is when an estate is large enough to be subject to the federal estate tax. Although a deferred annuity would continue to grow during the couple’s lifetime, there’s a possibility that the annuity will be subject to the estate tax at 40% for 2017. In addition, federal and state income taxes would also be due at a potential top rate of 39.6% for Federal income tax. Add in any state income taxes and this can become a tremendous burden.
Using the “Annuity Wealth Transfer Strategy”, estate owners can avoid substantial taxes by converting a deferred annuity to a single premium immediate annuity (SPIA).
Here’s how it works:
After a tax-free “1035 Exchange” of the non-qualified deferred annuity into a single premium immediate annuity (SPIA), the annuitant uses the after-tax SPIA payments to pay for the purchase of a permanent life insurance policy. Purchasing either a "Guaranteed-No-Lapse" Universal Life (GUL) policy (if single) or a "Survivorship Guaranteed-No-Lapse" Universal Life (SGUL) policy (for couples), rather than a whole life cash value policy will keep costs low and best serve the need.
The life policy can be owned by an irrevocable life insurance trust (ILIT) if there may be a taxable estate, so payments are made to the ILIT and insurance proceeds are not subject to estate tax.
Since life insurance proceeds are generally income tax free, the beneficiaries (in this case the children) may be able to avoid federal and state income tax on the life insurance proceeds.
Proper wealth management and estate planning all depend on each client’s unique situation, therefore the “Annuity Wealth Transfer Strategy” which assumes certain conditions (such as being healthy enough to qualify for a life insurance policy) may or may not be the best solution. It is just one of the various strategies available.
For a free consultation, please contact us for an appointment.
*This blog is strictly the opinion of Michael A. Malleo and not those of
ASH Brokerage Corp., nor any of our affiliates.
Malleo Financial Services LLC cannot and will not give any specific tax or legal advice.
Please consult your tax professional or legal professional for such advice.