Lifetime income annuities are a type of irrevocable contract with no liquidity according to The Street’s recent article titled, “Handcuffing your beneficiaries with annuities.”
Many parents have adult children who are still trying to figure out what they want to be when they grow up. Parents don’t want to hand over a large amount of inheritance to these children who may not have the wherewithal to use the money wisely. As a result, there are strategies that take care of "directionless" loved ones and lovingly "handcuff" them so they are unable to access the lump sum and blow it quickly. Annuities are the tool to use parental control while you’re alive and when you’ve passed away.
Simple and efficient income annuities like Single Premium Immediate Annuities (SPIAs) and Deferred Income Annuities (DIAs) have no annual fees and are easy to understand and explain. These are personal pension plans and transfer of risk strategies. They work well as financial handcuffs for your children.
The owner of an annuity has control over the money. The life expectancy of the beneficiary at the time income starts dictates pricing.
Here’s a typical "handcuffing" strategy that can be used on your children with you as the owner and your child as the beneficiary. Say you have a 30-year-old son who is unable to manage money. He’s the annuitant of a Deferred Income Annuity (DIA) that has income starting when he hits age 60. That lifetime income stream will be primarily based on the son’s life expectancy at 60. As the annuitant of the policy, he has no rights and can't cash in the policy. He’s just the recipient of the lifetime payment. The father is the owner of the policy, which means he has full control over the asset and can make changes to it. Because the annuitant is unable to make any changes, he’s financially handcuffed!
Another strategy involves a parent creating a joint lifetime income stream with them and their child or grandchild both as annuitants. In another example, an 80-year-old grandfather sets up a "Joint Life" Single Premium Immediate Annuity (SPIA) with his 10-year-old grandson. As the 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. When the grandfather dies, the income continues uninterrupted and unchanged for the life of that grandson.
With these "handcuffing" strategies, you must speak to a qualified estate planning lawyer to make certain that everything is set up properly. The actual annuity quote is a commodity, so shop around to find the highest contractual guarantee for your specific situation.
Reference: The Street (Feb. 6, 2020) “Handcuffing your beneficiaries with annuities.”