Handcuffing your beneficiaries with annuities
The Annuity Man
I always tell people that your beneficiaries are going to show up to your funeral in a Ferrari anyway, so just make sure they are making payments and didn't buy that sports car with the cash from your estate. Don't laugh. I'm serious. It happens.
A lot of people have grown children 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.
Owner vs. Annuitant
The owner of an annuity contract has full control over the money. The annuitant of the policy is who the lifetime income stream is based on. In other words, the annuitant's life expectancy at the time income starts drives the pricing train. Let me explain a typical "handcuffing" strategy that can be used on your kids with you as the owner and your kid as the beneficiary.
For example, a 30 year old child, that can't manage money to save their lives, is the annuitant of a Deferred Income Annuity (DIA) that has income starting when they turn 60. That lifetime income stream will be primarily based on their life expectancy at 60. That 30 year old child is the "annuitant" of the policy. They have no rights. They can't cash in the policy. They are only the recipient of the lifetime payment.
The father of this 30 year old is the "owner" of the policy. That means he has full control over the asset, and can make changes to the policy. The "annuitant" can't make any changes. Do you see the financial handcuffs and the gift given at the same time?
Lifetime Income Monster
Another strategy used is what I call the "Lifetime Income Monster" or "Legacy Income Monster." This typically involves an adult setting up a joint lifetime income stream with them and their child or grandchild...both as annuitants.
For example, a grandfather age 80 sets up a "Joint Life" Single Premium Immediate Annuity (SPIA) with his 10 year old grandson. Because lifetime income payments are primarily based on both life expectancies at the time income starts, the annuity company will base the payments on that young 10 year old child.
When the grandfather dies, the income continues uninterrupted and unchanged for the life of that grandson. 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.
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.