Is an Annuity a Beneficial Component of a New Mexico Estate Plan?Estate planning can serve a variety of functions, but one of the most important of these is fiscal planning for retirement or the financial needs of a surviving spouse. Annuities are a tool often used in estate plans to provide for such future needs. While these investment vehicles can have advantages like a guaranteed stream of income and tax deferred appreciation, there are also disadvantages associated with an annuity which make it important to seek legal advice when considering this estate planning tool. We have provided an overview of potential issues that must be considered if you are thinking about making an annuity part of your estate plan.

Potential Tax Impact: Although annuities allow investments to appreciate on a tax deferred basis, there can be negative tax consequences associated with annuities. If the value of your estate exceeds the threshold for exemption from estate tax ($5,250,000 in 2013), your beneficiaries will be exposed to estate tax liability. Even if your estate is considerably below this level, you may be subject to significant tax penalties if you must withdraw funds early from your annuity (prior to age 59 ½), you may be subject to a ten percent tax penalty, which can be as high as 25 percent in some situations.

Restrictions on the Death Benefit: A feature of annuities that many people find appealing is the death benefit. However, those considering purchasing annuities need to carefully review the terms of the death benefit because many plans provide an expiration date for the receipt of death benefits. In other words, your beneficiaries will receive no death benefit if you survive past a certain age.

Limitations on Investments/Growth Opportunities: Many annuities offer very limited investment choices so that the rate of return on your investment may be inadequate to provide the anticipated income stream needed after retirement or for your surviving spouse. Again, the key is shopping around because some larger financial planning companies may provide alternatives that include a number of mutual funds so that your annuity can earn a return closer to a 401K or IRA account.

High Management Fees: The costs associated with an annuity typically are much higher than with other forms of investment. The average cost associated with annual fees and management of the funds in an annuity is approximately 2.4 percent of one’s investment principal.

The Importance of Evaluating Retirement Accounts in the Context of New Mexico Estate Planning

The above information is designed solely to illustrate general principles of law, and does not constitute a specific legal opinion on individual cases. We suggest that you contact experienced legal counsel for a specific opinion tailored to your individual circumstances.

While annuities may be an effective estate planning tool, all estate planning strategies need to be carefully analyzed and evaluated. The estate planning process can be much smoother if you work with a New Mexico Estate Planning Attorney. If you have questions about estate planning, our New Mexico Estate Planning Attorneys at Jay Goodman & Associates, PC offer a free consultation in our centrally located offices in Santa Fe and Albuquerque so that we can discuss your specific situation. Call us today to schedule your free consultation at (505) 989-8117 to learn about your rights and options.


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