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IRA Legacy Planning

Wealth Transfer Planning

You have worked hard to accumulate wealth and take care of your family, and like many investors, you saved for retirement with tax-favored assets such as deferred annuities.  Now that you are nearing retirement, you realize that you have been more successful than you ever imagined and do not need additional retirement income.  Instead, you would like to pass your annuities on to your heirs as a financial legacy.  The problem is that while an annuity is an excellent vehicle for retirement planning, it is often a poor vehicle for wealth transfer.  That's because at your death, the annuity will be subject to a variety of taxes.  How can you best use your surplus deferred annuity to create a larger legacy for your heirs?  Wealth Transfer Planning with Deferred Annuities (Annuity Maximization) may be able to help.

What Annuity Maximization Is

Annuity Maximization is a way to move assets from your deferred annuity and use them to fund an Irrevocable Life Insurance Trust (ILIT).(1)  This ILIT can then purchase life insurance on you (and your spouse) and potentially increase the amount of money left to your heirs.

How It Works

First, you can create an income stream from your deferred annuity either by converting it to a Single Premium Immediate Annuity (SPIA approach), or by taking withdrawals as permitted under your annuity contract (withdrawals approach).  Then, you can create an ILIT and fund it with the after-tax annuity distribution, using annual exclusion gifts to avoid gift taxes.  Finally, the ILIT will purchase a life insurance policy that will pass to your heirs at death, free of estate and income taxes. (2)

The Benefits of Annuity Maximization

An Annuity Maximization approach can help:

  • Reduce estate taxes
  • Reduce income taxes in respect of decedent
  • Increase amount of money left for your heirs


  • The SPIA approach generally creates a larger income stream, and one that is guaranteed for the life of the annuitant.  A larger potential income stream means a larger potential death benefit for your heirs.  However, once a deferred annuity is converted to a SPIA, the principal is gone and is not available to you in case of an emergency.
  • The withdrawals approach is sometimes preferred because you can retain access to the principal of the deferred annuity in case of an emergency.  However, the income stream used with this approach is not guaranteed and is generally less than the SPIA, so less life insurance can be purchased.  Depending on the specific deferred annuity contract, withdrawals may be subject to surrender charges or penalty taxes if taken prior to age 59 1/2.


Sam (67) and Maggie Smith (62), Preferred Non Smokers, have an overall estate of $5,000,000 (growing at 3% a year after tax), and a deferred annuity of $750,000 which is currently growing at 5% a year.  They don't need this annuity for retirement income anymore.  At life expectancy in year 26, it will have grown to $2,666,755.  Under current tax law, it will be subject to combined estate and income taxes of $2,008,719, leaving only $658,035 for the Smith's three children.  Sam and Maggie take an annual withdrawal of $37,348 from the deferred annuity, which at the Smith's 35% tax bracket produces an after-tax income stream of $24,597 every year.(3)  The Smith's will give $24,276 annually to an ILIT which will purchase a $2,316,172 survivorship universal life policy on their lives.(4)  At their death, their heirs will receive this amount free of estate and income taxes, along with the after-tax remainder of the annuity principal.

As seen below, the total amount to their heirs in year 26 would be $2,558,945; almost $2 million more than without planning!


                                                            CURRENT SITUATION                      ANNUITY MAXIMIZATION

Annuity Value in Year 26                                  $2,666,755                                       $662,320                          

Life Insurance Proceeds                                                    $0                                     $2,316,172

Estate and Income Taxes

     due on Annuity                                                 $2,008,719                                         $419,547

Net to Heirs                                                                 $658,035                                       $2,558,945

Non Life-Insurance data is taken from a hypothetical calculation which assumes a hypothetical rate of return and may not be used to project or predict investment results. Life insurance data shown is taken from an illustration.  Benefits and values may not be guaranteed; the assumptions on which they are based are subject to change by the insurer.  Actual results may be more or less favorable.

This material does not constitute tax, legal or accounting advice, and neither The Financial Retirement Group nor any of its registered representatives are in the business of offering such advice.  It cannot be used by any taxpayer for the purpose of avoiding any IRS penalty.  It was written to support the marketing of the transactions or topics it addresses.  Comments on taxation are based on understanding of current tax law, which is subject to change.  Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.

1. Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping transfer tax). Failure to do so could result in adverse tax treatment of trust proceeds.

2. Life insurance death benefit proceeds are generally excludable from the beneficiary's gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration. No legal, tax or accounting advice can be given by The Financial Retirement Group, nor it's registered representatives.  Prospective purchasers should consult their professional tax advisor for details.

3. Assumes withdrawals net of income tax consequences and surrender charges.  Withdrawals and years to pay premium are hypothetical calculations. Premium payments are always the responsibility of the policy owner, and withdrawals from the annuity may not support such premium payments.

4. Based on Male, Age 67, Preferred Non Smoker and Female, Age 62, Preferred Non Smoker.

Insurance policies and/or associated riders and features may not be available in all states.