Annuity for Estate Planning

[txtig]

Has anyone used an annuity in connection with estate planning? I have one adult son (age 30) that I am fairly certain would quickly blow through any inheritance. I’m thinking of splitting his portion of our estate into two buckets, an immediate distribution that he could use to help buy a house or other major purchases (or pay off debt); with the balance of his portion (about 2/3 of his overall portion) funding an annuity to give him lifetime income. Is it possible to buy an annuity for someone in their 30’s? Pro’s and con’s? Any tax implications?

 

[OldShooter]

You would be better off setting up a trust. The trustee can give DS funds according to instructions, but the trust can provide flexibility. For example if DS ends up with medical problems where home care or palliative care is needed, the trustee can pay for that where a fixed annuty would not be adequate. Also, if DS dies, the remaining balance in the trust can be used as you see fit. Education for his children if any, donations to charity, etc. Whatever you like.

Our estate plan sets up such a trust for our son; he is a nice person but financially naive so we don't want to just dump a bunch of money into his hands. We have specified Schwab as the trustee. They have recently begun offering trust services and the fees are much lower than megabank's.

You do want a professional trustee not a family member. Too much potential for conflict and ruined relationships if the trustee is family.

 

[38Chevy454]

Concur on the trust. I had a sort of related issue on my parent's estate where my sister's portion was put into an irrevocable trust that I am the trustee for. I was also the trustee for my parent's estate trust. As in many cases, my sister is not good with financial things and would have blown the money. As it is now set up, the irrevocable trust is basically me investing for her retirement. But I can also tap money as needed for extraordinary expenses.

 

[CRLLS]

Has anyone used an annuity in connection with estate planning? I have one adult son (age 30) that I am fairly certain would quickly blow through any inheritance. I’m thinking of splitting his portion of our estate into two buckets, an immediate distribution that he could use to help buy a house or other major purchases (or pay off debt); with the balance of his portion (about 2/3 of his overall portion) funding an annuity to give him lifetime income. Is it possible to buy an annuity for someone in their 30’s? Pro’s and con’s? Any tax implications?

Have you ever heard the TV jingle : "I have a structured settlement and I need cash now. Call J G Wentworth…." Annuities may not the best way to preserve the inheritance over time.

 

[bolt]

IMO being a child ends at 18, it ended for me @14.

Seems your 30yr old "child's" not launched yet?
Economic outpatient care still? At 30? Still?

Autistic?

I suspect you're a enabler also. JMO.
Just another viewpoint. Hope it helps.

Good Luck!

 

[pb4uski]

^^^ That's just plain rude.

The 30 yo might be launched and doing ok but just not in a position to have a six or seven figure sum dropped into his lap and deal with it like his parents would like.

I have the same thoughts of our 30 yo... he works full-time and has lived on his own for years and is fully launched.... has an IRA and more savings than many older adults.... but he isn't very sophisticated financially and would need guidance to manage a seven figure inheritance.

 

[txtig]

IMO being a child ends at 18, it ended for me @14.

Seems your 30yr old "child's" not launched yet?
Economic outpatient care still? At 30? Still?

Autistic?

I suspect you're a enabler also. JMO.
Just another viewpoint. Hope it helps.

Good Luck!

As to whether he’s launched or not, depends on your definition of launched. He’s definitely not on the fast track to FIRE, but he owns his own home (a manufactured home), has two young kids that he has joint custody of, and I’m not currently providing him any financial support.

But, he’s got a checkered work history and struggles with money issues. Has little to no savings. That’s why I’d rather that, he receive some sort of structured payments over a long time period rather than a big one-time windfall.

I will separately provide a trust for the benefit of my grandsons (his sons), but I’m just looking for a mechanism to avoid giving him the opportunity to squander what could be a significant inheritance.

I worry that dropping a big lump sum in in his lap some time in the near future might actually be detrimental to him in the long run. Reduce his incentive to work hard to provide for himself and his kids. That’s why I was considering setting up an annuity for him rather than just having him inherit his share all at once. An annuity would provide a level of extra income/security for him, while still ensuring that he still needs to hold down meaningful employment.

I appreciate the comments suggesting a trust rather than funding an annuity. I’ll look into that option.

 

[GalaxyBoy]

I inherited an annuity a couple of years ago. Not sure if there's a way to set it up differently, but I had the option of immediately annuitizing it (the broker pressured me to roll it over into a different annuity, surely one that would have made him more money), or to withdraw the funds within 5 years (DB took his immediately; I'm taking mine over 5 years to stretch out the tax pain). In this case it was a non-qualified annuity so the money is taxed as ordinary income.

The least painful choice of mutual fund (or MF-like product) the annuity company has is a total stock market index fund. With an expense ratio of 0.28%, the broker remarked, "wow, that's a really low ER!" Yeah, among the products you sell, maybe.

Anyway, a better and more complete explanation is here:
https://www.investopedia.com/ask/answers/09/inherited-annuity-distribution.asp

Bottom line: I know DF meant well but I sure wish he had put the money he intended for me and DB to inherit in some other investment vehicle.

 

[bolt]

^^^ That's just plain rude.

The 30 yo might be launched and doing ok but just not in a position to have a six or seven figure sum dropped into his lap and deal with it like his parents would like.

I have the same thoughts of our 30 yo... he works full-time and has lived on his own for years and is fully launched.... has an IRA and more savings than many older adults.... but he isn't very sophisticated financially and would need guidance to manage a seven figure inheritance.

No, no its not rude. IMO.
I fail to see how the truth is rude.
The truth is a harsh mistress .
Nothing in that post is anything other than fact or opinion based on my life's learning or experience.

I do not live my life in a world of excuses & pretense'.
It's unlikely many of us were fully cognisent of old age & this newer age thing called retirements needs @30, much less FI-RE.

Best wishes....

 

[bolt]

I appreciate the comments suggesting a trust rather than funding an annuity. I’ll look into that option.

A trust does sound better as annuities are readily arbitraged in the second hand marketplace, usually at distressed papers rates.
But laws change.

I've seen many provided for that become accustomed to that.
Those not provided for and on their own usually make out better long term.

Good luck!

 

[Llep]

Have you ever heard the TV jingle : "I have a structured settlement and I need cash now. Call J G Wentworth…." Annuities may not the best way to preserve the inheritance over time.

I LOVE that jingle! Because of it, that is the only phone number I know by heart!

 

[SnowballCamper]

There is an interpretation that I would have if my inheritance was in structured payments, "Thanks Dad, even in death you won't let me make my own decisions."

I get it if the descendant is pre-college age, but at 30 the frontal lobe is fully formed.

Just one guys perspective here.

 

[OldShooter]

There is an interpretation that I would have if my inheritance was in structured payments, "Thanks Dad, even in death you won't let me make my own decisions." ...

And your point is?

Dad is not letting the son make his own decisions for a couple of sound reasons: (1) It's Dad's money and (2) Dad has seen that son does not make good financial decisions.

If son comes to the conclusion that you suggest, that is son's problem not Dad's.

 

[SnowballCamper]

And your point is?

Dad is not letting the son make his own decisions for a couple of sound reasons: (1) It's Dad's money and (2) Dad has seen that son does not make good financial decisions.

If son comes to the conclusion that you suggest, that is son's problem not Dad's.

Of course we're responsible for the conclusions we draw from other people's actions. But we can't know all the conclusions that other people draw from our actions. I was just sharing one possibility, that might be relevant to the Dad in this scenario.

 

[HI Bill]

The OP's 30-year old son, along with most folks, are likely to blow through a large inheritance, lottery winnings, or pro athlete's earnings in less than a decade. If the son is not a LBYM person, then I can totally understand the father's intent.

But if the 30-year old son is a fully functional adult, I would consider some education...if the OP's son isn't open to that, or doesn't act on that, then the trust idea is probably the best option. I'd set it up with an initial lump sum (say, for house or starting business), then have 3.5%+ annual distributions set up thereafter, depending on the total value.

 

[OldShooter]

... if the 30-year old son is a fully functional adult, I would consider some education...if the OP's son isn't open to that, or doesn't act on that, then the trust idea is probably the best option. ...

Well, there's more to it than just that. Holding the money in a trust protects it from being part of a divorce settlement and from judgments against DS. Tough to contemplate, but if DS and his wife perish in a common disaster, their assets may end up in the hands of a conservator or guardian for the children. A trust keeps the money from being controlled by this possibly-unknown person. In the case of a special needs beneficiary like one of our grandchildren, a trust can be written in a way that it does not substitute for any government assistance that the person may be eligible for. If the money went directly to the individual, regardless of competence, then it will have to be spent down before the government steps up.

So it is not as simple as looking solely at the financial competence of the beneficiary.

 

[OldShooter]

No, no its not rude. IMO. ...

I agree with @pb4uski. It's rude. So you are outvoted 2:1 so far.

 

[SnowballCamper]

Seems there is a real difference here... So I'll elaborate a little bit.

Of course it's dad's money to spend as he pleases. But by making a highly structured inheritance for son, he emphasizes that he wants to control son's decisions. Just as much as dad's money is for dad to spend as he wants, the son is an adult and is responsible for his own decisions.

So the point is that it's sad that a father can't let their kid grow up, and thus feels the need to constrain a 30+ year old through what is essentially a bribe (son, you can have the money, but you have to use it in this way).

It would be better if dad just spent the money before he died. Since he knows so much better, he can just buy what son needs and give it to son before he dies.

 

[pb4uski]

No, no its not rude. IMO.
I fail to see how the truth is rude.
The truth is a harsh mistress .
Nothing in that post is anything other than fact or opinion based on my life's learning or experience.

I do not live my life in a world of excuses & pretense'.
It's unlikely many of us were fully cognisent of old age & this newer age thing called retirements needs @30, much less FI-RE.

Best wishes....

Yes, it is rude to go off half-cocked and be critical of a situation with very little facts at your disposal.... you didn't have near enough facts to go on... and you were rude.... not my problem that you can't face the truth.

 

[pb4uski]

I agree with @pb4uski. It's rude. So you are outvoted 2:1 so far.

Perhaps a poll!

 

[Floridatennisplayer]

Rude and uncalled for.

 

[Ed_The_Gypsy]

This is a concern of mine as well.

The best we can come up with so far is partially funding the kids' Roths with the strong admonition that it cannot be touched until 65.

If or when they ever discover that they actually CAN access earlier, we hope they will be more fiscally responsible.

To my shame, I did not deal with inheritance from my father particularly well.

MANY years later, we are planning much better for DW's forthcoming inheritance. We do not need it and it may pass to the kids more successfully.

 

[Ed_The_Gypsy]

This is a concern of mine as well.

The best we can come up with so far is partially funding the kids' Roths with the strong admonition that it cannot be touched until 65.

If or when they ever discover that they actually CAN access earlier, we hope they will be more fiscally responsible.

To my shame, I did not deal with inheritance from my father particularly well.

MANY years later, we are planning much better for DW's forthcoming inheritance. We do not need it and it may pass to the kids more successfully.

I must note that we have been giving some selective support to the chil'n even as 'adults'. This has been successful and rewarding.

 

[Ed_The_Gypsy]

(in case it is not obvious, I am having a heck of a time editing all this on my phone.)

 

[The Cosmic Avenger]

Rude and uncalled for.

+1. That's 4:1 now. And this isn't Bolt's first dismissive comment.