Should DMIL annuitize?

[CardsFan]

Sooo....

DMIL has a variable annuity. FYI, we are not involved in her day to day finances, so this is new to us. Cost basis is $200k. Current value $800k. Value in April $520k. DMIL is 90yo. 3 daughters to inherit. 2 married, 1 likely to never be married. DMIL has no need what so ever for the income, even if she had to go to an assisted living facility. There are plenty of other assets. So this money will be re-invested, with after tax step up basis for heirs, when that happens

I don't know DMIL's annual income, but I am guessing she is marginally in the 22% bracket, or at least close to it.

FA called, pointing out that:

- a VA is not a good way to leave an inheritance
- the VA would require immediate dissolution at death, potentially causing high taxes for the heirs
- We are near a recent market high, and this would lock in the gains
- Annuity would be life with 10 year certain.
- if annuitized, inheritors can continue the annuity, or take a lump sum.
- Annuity is currently Bright House, but they would buy an immediate annuity from New York Life.
- Annuity would need to be cashed out or re-annuitized in 3 years.

I feel rather conflicted trying to give advice based on optimizing a potential inheritance for DW.

I don't want to discuss the pros/cons of a VA. That's done. And I don't want to discuss the pros/cons of an FA.

Just want opinions on the recommendation.

It seems reasonable to me, particularly given the market highs and the past volatility of the annuity value.

Thoughts?

 

[pb4uski]

What is the IRR of the 10 year certain? =RATE(120,monthly payment,-800000,0)

If ~1% or more than I'd consider the 10 year certain with the daughters designated as beneficiaries.

 

[CardsFan]

What is the IRR of the 10 year certain? =RATE(120,monthly payment,-800000,0)

If ~1% or more than I'd consider the 10 year certain with the daughters designated as beneficiaries.

From the math I did, the IRR is under 1%, but the payout is very close to a quick look at immediateannuities.com. But given DMIL's age, and the current market volatility, it seems locking in a given, near a current high, makes sense.

 

[pb4uski]

Yes, I would agree. Better yet, it locks in for DMIL and the 3 heirs.

If for some reason they want continued exposure to the market they can use some of the annuity proceeds to buy SPY LEAP calls.

 

[Z3Dreamer]

With a VA, the owner (DMIL) picks the investments. The only way the investments have grown from 520k to 800k is in the market, which is fine. From what you said, the only reason FA is suggesting the payout is to lock in the gain. Better, would be for DMIL to change investments from what the current AA is to an AA of 0/100. Problem solved.

Many annuities do not require that distributions start until 95 or so.

When you annuitize, it is another opportunity for the insurance company to make money. Instead DMIL can just begin distributions without annuitizing, depending on her contract.

In summary, change AA to lock in gains, take whatever distributions she can reasonably fit in desired tax bracket.

 

[OldShooter]

Be very careful when evaluating FA's advice. There is almost certainly another big commission in this if MIL annuitizes. I would ask the FA, in writing, to disclose his/her financial interest in MIL's decision. Request a letter to MIL.

You'll get better advice here than you will from an FA who is looking to feather his own nest.

 

[upset264]

"the VA would require immediate dissolution at death"

Generally inherited annuities require full distribution within five years of the death of the original owner. Perhaps your annuity has different restrictions but I would check whether or not the FA's statement that full distribution is required at death is accurate. I inherited a Vanguard Variable Annuity from my father in 2016. While I pondered the distribution options which I believe required a full distribution within five years, Vanguard informed me that there was now a "stretch" option, similar to RMD's from an IRA.

I chose that option and now receive quarterly distributions based on the previous years ending account value. Just like an IRA only you use the original owners life expectancy (my father was 92). Much softer tax impact than 5 year distribution.

Obviously your situation is different but the distribution rules can be complex and I would verify the information you were given.