Do you currently own an annuity you don't need or want? There are tax savings opportunities that you may not be aware of. Take for instance, Howard, age 65, and receiving $7,500 per month from the purchase of a single premium immediate annuity (SPIA). The annuity was purchased 5 years ago for approximately $1 million dollars and is guaranteed to pay Howard or his beneficiary for a period of 20 years. So far, Howard has received 60 of the 240 monthly payments.
Howard's income needs have decreased and instead would like to leave money to his children. Howard decided to call the insurance company that sold him the annuity and requested to cash out half his annuity payments. Howard was frustrated to learn that once the decision is made to enter into a 20-year-certain income annuity contract, there is no re-do.
Howard met with his financial planner who advised him to sell his annuity payments to an annuity buyer in the secondary market. After weighing his options, Howard decided to sell half of each remaining payment for a lump sum of cash. Doing so allowed Howard to continue receiving $3,750 per month for the remaining 180 months.
Furthermore, Howard was advised that he could purchase a life insurance policy with a $1.4 million dollar death benefit with his lump sum cash proceeds.
In a situation like this, the insurance policy would be purchased by an insurance trust and a gift tax return would be filed for the lump sum of cash gifted to the trust. However, in Howard's case, there would be no gift tax due since the amount is less than the $1 million life-time gift tax exclusion. In fact, since Howard's cost basis in the annuity payments sold was higher than the proceeds received, there was a loss which would be reported on Howard's tax return resulting in tax savings.
Now let's consider what would happen if Howard did not sell any portion of his annuity payments and died before receiving the remaining 180 annuity payments. Beginning in the year 2011 and beyond, the maximum federal tax-free estate transfer exemption is $1 million dollars. If Howard's estate is above the $1 million threshold, the remaining annuity payments would have to be valued for estate tax purposes. Using present value calculations, one could derive the present value of the annuity and determine estate taxes due. Using the top estate tax rate of 55%, the beneficiaries of Howard's estate would owe more than $550,000 assuming the present value of the remaining 180 payments of $7,500 is about $1 million for estate tax purposes.
Unfortunately, the beneficiaries will have to raise money for estate taxes or sell the annuity payments to pay off Uncle Sam.
Now let's consider what would happen if Howard did in fact sell half of each annuity payment whereby Howard retains 180 monthly payments of $3,750 and sells the rest. If Howard died, estate taxes of approximately $275,000 would be owed. Unlike the example above, his estate would receive a $1.4 million dollar death benefit as a result of the life insurance policy Howard purchased with his lump sum cash proceeds.
Hard-earned money ought to be invested well, so it can be relied on during your twilight years, especially when you have few or no other family members you can rely on for living expenses and emergency needs. As such, it pays to find out how the whole process of buying and selling annuities works and the various options available.
An annuity connotes tax-deferred savings, and if you are intent on investing in one, you should carefully study which one may be suited for you. It will be good to discuss your investment options with a reputable insurance agent or investment manager (choose one recommended by friends or family members, or someone who is not doing the hard sell and is intent only on earning a fat commission from a closed deal). Go for a financially stable company with a track record of experience. Not all states will be able to provide protection in case an annuity provider becomes insolvent.
At around age 55, it will only take a few more years - at age 59-and-a-half, for you to be able to withdraw money from your annuity without a penalty. Tapping into your annuity funds before age 59-and-a-half is not advisable (the only exceptions are an untimely demise and becoming disabled), if you do not want to be slapped with a 10 percent penalty tax.
Before opting to buy an annuity, consider your own financial needs and capabilities beforehand. Determine how long your money will be tied into the investment. You may opt for a fixed annuity if you want a secure and constant rate of return. The other option, which is tied to market forces and the performance of the investments involving those factors, is a variable annuity.
Indeed, retirement savings may be invested smartly to ensure a stream of funds that can greatly help you later on in your day-to-day living expenses. Start researching on the best plan suited for you, and whether it will be easy getting money for your annuity. Learn about the cash payout options as well as how you can stretch your hard-earned funds.
As with any structured payment stream (other examples include structured settlements, owner financed mortgage notes, and lottery winnings), holding an annuity has many benefits. On top of the guaranteed payment stream - presumably the original reason for purchasing the annuity in the first place - there are tax advantages and the potential for capital appreciation. None of these reasons for purchasing a annuity from an insurance agent are trivial. Don't throw them away needlessly.
But no one knows exactly what tomorrow hold for them, and there may come a time when cashing out your plan for a single lump sum of money is necessary. Perhaps even critical.
Each of these reasons (and others besides) might compel a person to liquidate their annuity plan. With that infusion of cash, legal problems might be averted, the loss of a home avoided, or strong capital growth might be accomplished. All are worthy ends in themselves; just be sure (in the case of various hardship examples) that all other options have been explored, and in the case of the hot investment that it really IS a hot investment. Too many stories of people flushing their life savings down the tube because of greed and lack of information. In each case, perform your due diligence!