Estate Planning and Commercial Annuities

However, in these difficult economic times, when it takes sophistication to make good investment decisions and when many estate owners do not have access to that type of professional advice, an annuity can achieve certain goals, even in the largest estates. There are three common scenarios that can arise in an estate plan in which an annuity can prove useful:

1. Providing for a longtime household employee.

2. Making a gift or bequest to an individual privately, when there are concerns about his or her ability to handle funds.

3. Managing the investment of a trust where the surviving spouse is not the parent of the remainder beneficiaries of the trust.

In these scenarios, an immediate annuity—an annuity contract where payments must begin within one year—may be appropriate. A deferred annuity, where funds accumulate until the contract is converted to an income stream, can be a useful tool in some estate planning situations, but not in situations that require payments to begin shortly after the annuity purchase.

Obviously, an annuity is not the sole solution to these situations; often, a trust could achieve the same goals with greater flexibility. However, trusts are expensive. Moreover, the selection of a trustee can be difficult and flexibility may not be a consideration. When this is the case, a commercial immediate annuity should be considered. If annuity payments are needed for the recipient’s lifetime, a life annuity is required. If the goal is merely to provide a set number of payments, a period certain annuity is called for. In either case, consideration should be given to whether the annuity payments ought to be fixed, increase each year or vary with the performance of investments. In the first two cases, a fixed immediate annuity will work. (Many, but not all, immediate annuities offer a cost of living adjustment, in which payments increase each year by a specified percentage). In the third case, a variable immediate annuity is required in which annual payments may increase or decrease, depending upon how the variable investment accounts chosen for the annuity perform. In any event, an immediate annuity will provide the certainty of an income for a period of years or for the lifetime of the “annuitant.”