A trust is one way to leave a legacy, but you’ll need to hire a lawyer to draw it up. And there may be ongoing management fees that will reduce the amount your loved ones will receive.
There are simpler, cheaper ways to leave a legacy. For instance, you can buy a cash-value life insurance policy or fund a 529 college savings plan.
But one of the best options, an income annuity, is usually overlooked. It’s an ideal vehicle for leaving a legacy.
An annuity offers unique benefits. It’s the only gift guaranteed to keep on giving for a lifetime.
Here’s how it would work for a grandchild. You buy a longevity annuity—also called a deferred income annuity—for your grandchild. This type of annuity defers payments until a future date that you choose.
For example, your grandchild is 10 years old. You make a $100,000 deposit. You decide to have income payments begin when your grandchild reaches age 25 and continue for the remainder of his or her life.
One top insurer will guarantee a payment of $617.25 per month, with $470.96 of it taxable. If your grandchild lives to age 85, he or she will collect $444,420: $344,420 in interest plus the $100,000 of principal.
Why It’s Foolproof
An income annuity has no cash value. So, after you’re gone, your grandchild won’t be able to blow the money on a fancy pickup truck or whatever. And since he or she will receive a check from you every month, you’ll be remembered fondly.
If you choose annual payments, you might have the annuity check arrive each year on your grandchild's birthday or on Christmas, Hanukkah or another holiday.
You can also extend your legacy. With the right type of annuity and strategy, you can choose to have annuity payments continue to go to his or her child or children for the remainder of their lives, too.
While you may never even meet your great-grandchildren, they too can receive a regular gift from you.
This option, however, does reduce the amount of income your grandchild will receive.
In addition, the checks can increase. You can add an inflation-protection rider so that the amount will go up over time. This will help the recipients retain future purchasing power.
Over time, an initial deposit of $100,000 could grow to $300,000, $400,000, or more in total gifts received. It depends on how long the income pays out, the internal rate of return offered by the insurance company, and how many recipients are set up to receive the income payouts. What other financial product will let you do this?
Another advantage is tax efficiency. When income is received, only a portion of it will typically be taxable. This is because part of the income from an annuity is considered to be a return of principal and part is considered to be earnings. While earnings are taxed, return of principal is not.
While others may give gifts that are soon forgotten, providing those loved ones with an ongoing gift of income that will last for the remainder of their lives or longer will ensure that you have created a legacy for yourself as well as a nice financial cushion for the younger generation of your heirs.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.
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