How can investors structure certain finances in a manner that protects their heirs from excessive taxes, legal issues, and attorneys? One approach to consider is an annuity.
Thinking about death probably isn’t your idea of a fun weekend activity. Considering the probate process, and how to avoid probate, likely isn’t high on your list either.
But estate planning is an important topic. With some thought, you can help ensure that attorney fees, court costs, or taxes don’t eat up too much of your legacy.
You might not be thinking about leaving a legacy just yet if you’re younger and focusing on growing your nest egg or paying for college. But as you move closer to retirement, you may begin to think more about income generation and capital preservation—and leaving something behind.
As you start to think about priorities for your legacy, probate considerations may come more into focus, says Matthew Sadowsky, director of retirement and annuities at TD Ameritrade. Probate is the legal process of administering someone’s estate after they die.
Probate court can be expensive—in some states, attorney and court fees consume up to 5% of an estate’s value—and ties up property for months or even more than a year, according to legal information provider Nolo.
Assets that are removed from your Estate can avoid the probate process, Sadowsky says. If you can avoid the probate process, more of your assets can go to your beneficiary instead of attorney and court costs, and potentially less on estate taxes.
are one way to do this because you can name beneficiaries to inherit any leftover money—or even a guaranteed minimum—after you die, regardless of whether you have a will.
Another reason you might want to use an annuity to avoid probate court is that the probate process is open to the public—and those sometimes-contentious relatives. Using estate planning strategies, such as annuities, to remove assets from the probate process can help to avoid public disclosure of estate details.
Sadowsky says that avoiding probate is a feature that people often don’t think about when buying annuities. “It’s not the reason for the transaction,” he says, but “it’s often the gravy on the meal.”
In addition to inheritance tax avoidance and other death benefits, there are other potential benefits that can come from annuities, such as tax deferral, tax-advantaged income, and guaranteed income, Sadowsky says.
But, as with many investments, annuities are complex products, and they aren’t for everybody. If you’re considering an annuity, it’s important to educate yourself on the benefits and disadvantages.
In addition to annuities, you can also use an irrevocable trust to avoid probate because, unlike revocable living trusts, you can’t pull assets in these trusts back into your estate, Sadowsky says.
Of course, you can also give away assets while you’re still living, but there could be federal—and possibly state—gift tax considerations, depending on how much you give away.
If you have a complex estate with sizeable assets and multiple beneficiaries, it’s even more critical to get the right guidance on managing your estate to maximize what goes to your beneficiaries—and minimize what may have to go to Uncle Sam. This could include the estate tax, or death tax, from the federal government and some states. Certain states also have an inheritance tax.
All this can get pretty complicated, and you may want to consider hiring a tax professional and/or an estate planning attorney.
Matt Whittaker is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.Investment and Insurance Products: Not FDIC Insured * No Bank Guarantee * May Lose Value
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.