Gifting
Learn how to take care of your beneficiaries using annuity & life insurance contracts
A lot of people have grown children or grandchildren that are what I call "wandering ambiguities." They haven't "found their path" yet. You know what I mean. They are dancers, writers, artists, musicians. In other words, they probably aren't going to make much money in their chosen profession. Or worse, they don't have a chosen profession and are still living in your basement.
What this dilemma has forced me to develop are strategies that take care of your "directionless" loved ones, but lovingly "handcuff" them to not be able to access the lump sum and blow it on a weekend in Vegas. Annuities are the perfect contractual vehicle to deliver this type of parental control while you are alive and when you are in the grave.
Irrevocable Is A Good Thing
Lifetime income annuities like Single Premium Immediate Annuities (SPIAs) and Deferred Income Annuities (DIAs) are irrevocable contracts with no liquidity. You will get all of your money back if structured properly at the time of application, but it will be in payment form. No lump sums for Ferrari purchases!
Simple and efficient income annuities like SPIAs and DIAs have no annual fees, no moving parts, and are easy to understand and explain. These annuity types are personal pension plans and pure transfer of risk strategies. They also work well as financial handcuffs for your wayward loved ones.
Your grandchildren deserve the best
A lifetime gift annuity is a perfect way to provide your grandchild with an income for life, even after you die. It’s a great way to give your grandchild financial security without having to worry about them later in life.
If you have extra money that you don't need for retirement, a lifetime gift annuity is the perfect present to give to your loved ones.
What Is A Lifetime Gift Annuity?
A lifetime gift annuity is a unique way of structuring a life annuity.
First, you buy a type of annuity called a joint annuity on your and your grandchild’s lives. With a joint annuity, you pay the insurance company a lump sum amount. In exchange, the insurance company will pay you an income for life until the latter of you and your grandchild’s death.
In most likelihood, you will pass away before your grandchild. The income will then continue uninterrupted to your grandchild until they die, too, providing them with an income for life.
In essence, you’ve provided a lifetime income for them. Hence the term, lifetime gift annuity.
How do you structure a lifetime gift annuity?
Here are the things you need to consider when buying a lifetime gift annuity:
Type of annuity: The annuity needs to be set up as a joint annuity with you and your grandchild as annuitants. You can defer payments by up to 10 years if you don’t want to provide the gift now. The benefit of deferring payments is that the income will grow to a more significant amount once it starts.
Ownership: You will want to own the annuity with your grandchild as the contingent owner. When you die, ownership will transfer directly to your grandchild and bypass your probate. This helps you avoid paying expensive probate and executor fees on your assets.
However, if your grandchild is a minor, you’ll want to avoid naming him as the contingent owner. That’s because an annuity is an insurance contract, and minors may not legally own one, depending on your jurisdiction. You can name a trusted family member as the contingent owner and change it when your grandchild reaches the age of majority.
Source of funds: You can only use non-registered funds to buy the annuity.
Annuitants: You and your grandchild.
Taxation: You have to pay tax on the interest part of the income while you’re alive. When you die, your grandchild will be responsible for paying taxes. For lower taxes, you can set it up as a prescribed annuity.
Payment frequency: You can have the annuity pay monthly or annually. Choosing your grandchild’s birthday as the payment date makes an incredible birthday present!
Amount: This is up to you! You can gift as much as you want or as little as you want. You can even target an income amount and work backward to see how large a deposit you need to generate this income.
For example, say you are a 65-year-old man, and you want the annuity to provide $5,000/year for your 18-year-old grandson. You will need to deposit $170,871 into the annuity to generate this income.
Talk about a legacy gift! Every month when that check hits the bank account, that grandson will definitely have a good thought about old granddad.
Who should consider a lifetime gift annuity?
Here are the top 5 reasons why you should consider a lifetime gift annuity:
1. You want to provide a gift now. While you can leave a bequest in the will or by naming your grandchild as the beneficiary of your life insurance policy, they won’t get anything until you die. With a lifetime gift annuity, you can provide the gift now and in the future.
2. You want to provide a lasting gift. Most gifts are a one-time deal. By using the lifetime gift annuity strategy, you can provide a continuous stream of income for the life of your grandchild. Not many other gifts give you this kind of benefit.
3. You have money that you don’t need for your retirement. Remember, once you start an annuity, you can’t get your money back. You’re only entitled to the income that the insurance company pays you. It would be best to only use the lifetime gift annuity with cash that you don’t need for your retirement.
4. Your grandchild is a spendthrift. If you were to provide a one-time lump sum gift to him, they might spend it all at once! Having the annuity pay once a year puts a limit on how much they can spend at a time.
5. It doesn’t have to be a grandchild. You can use the lifetime gift annuity for your child, niece, nephew, great-nephew or niece, and more. Feel free to be creative and use the strategy for a loved one.
Tax Experts Involved
With these types of "handcuffing" strategies, you absolutely need to consult with a qualified tax professional or tax lawyer to make sure everything is set up properly from an estate planning standpoint. The actual annuity quote is a commodity, and should be shopped with all carriers to find the highest contractual guarantee for your specific situation.
Lifetime income is a gift when you are alive, and it can definitely be a gift to a loved one when you are dead. Just remember that annuity contracts are customizable so that you can structure the policy to achieve the goals you have for yourself and your beneficiaries even if that means using financial handcuffs to make sure they are taken care of.
Another thoughtful gift: Buying life insurance for children or grandchildren
Gifting life insurance is a great way to show your children or grandchildren just how much they mean to you. It may be a little different from what they would expect, but here are a few reasons why life insurance makes such a great gift.
1. Life insurance can last a lifetime.
Whole life insurance provides death benefit protection, creates a living legacy that will accumulate cash value with each passing year, and may help your child or grandchild get a head start on their financial future.
2. It won’t wear out or fall apart.
A life insurance policy purchased for your kids or grandkids today can still be there and increasing in value years from now, if you continue to pay the policy premiums. That’s something that conventional gifts don't offer.
3. Life insurance has accumulation potential.
Most gifts lose value over time, but a whole life insurance policy has the potential to accumulate cash value each year. That cash value can be accessed1 for things such as a down payment on a home, to help pay for college, to fund a business opportunity, or to provide a comfortable retirement if the life insurance needs decrease.
4. Tax advantages
Under the current law, cash values that accumulate in the policy are tax deferred. Even when cash values are borrowed, there are no tax consequences in many instances. Proceeds received by beneficiaries are also generally not taxable as income. Speak with your tax advisor for more details.
5. Lower premium rates for insuring a child.
Premiums generally increase with age. However, with whole life insurance, it’s possible to lock in the premium at the child’s current age for life.3Some whole life insurance policies have various premium payment durations, allowing you to pay them off in as little as 10, 12, 15, or 20 years. There are even programs available that enable you to make a single lump sum payment to pay for one or multiple policies — a great idea for grandparents! That way when the kids are responsible enough to become the owner, they won’t have any premiums to pay.
6. It can help guarantee future insurability.
Once the policy has been issued, coverage cannot be canceled if all required premiums are paid. Also, if a Policy Purchase Option (PPO) Rider is included with the policy, the insured has the right to increase coverage at designated dates, regardless of insurability.
When you insure a minor child or grandchild, the life insurance policy is generally owned by the purchasing adult until the child reaches the age of majority as defined by state law. When the child reaches the age of majority, ownership of the policy can be transferred to the child.
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