Stretch Annuity / Legacy Annuity

By Compuquotes Team on August 18th, 2008


A stretch annuity is not that well-known, only because not many financial firms offer it. It does have distinct advantages.

An annuity itself comes in many types and structures, one of which is the stretch annuity. A stretch annuity is defined as an annuity where allowances, which are tax-deferred, are provided to the beneficiaries. This gives them more flexibility and management over their investments. The good thing about a stretch annuity is that the beneficiaries don't have any wealth transfer worries, and are not slapped with a huge tax bill which surviving members have to deal with.

The key is in the word 'stretch'. This means that beneficiaries receive payments or allowances over a longer period of time. A stretch annuity is also known as a legacy annuity, but as we mentioned earlier, not many insurers offer it.

Who Benefits Most from Stretch / Legacy Annuities?

Stretch or legacy annuities are not for everyone. Usually, it assumes that they could be the perfect solution for very wealthy individuals with existing annuities and whose beneficiaries are likely to be in a high tax income bracket as well.
Exactly what kind of individuals are suited for legacy annuities? They are for people who:

  • have sufficient financial means - they don't have to use their annuity because their financial resources are more than adequate and will cover their lifetime expenses;
  • intend to transfer a substantial portion of their wealth to their heirs;
  • want to avoid paying high estate taxes on their present annuities;
  • have heirs who will most likely also be high income earners.

The Skinny on Stretch Annuities

If you're familiar with stretch IRAs, then you already know some key concepts that characterise stretch annuities.

  • One, a stretch annuity diminishes whatever tax burdens your beneficiaries may face when they inherit your estate.
  • Two, it can specify how and when your beneficiaries will inherit your assets based on regulations as precribed by law. The few companies who offer stretch annuities have come up with a cost-efficient method of achieving this.
  • Three, a stretch annuity is meant to be a multi-generational approach. This means that its purpose is to provide the assurance to the owner that his annuity will continue to provide income to his future generations. It is therefore a great strategy for estate planning, especially where taxes are concerned. An increasing number of wealthy individuals welcome all or some of the features of a stretch or legacy annuity.

Some of these features include:

  • increasing the annuity's value amount by spreading out tax deferrals over a longer period of time. In some cases, withdrawals from the annuity can be made and will not affect the value amount;
  • for beneficiaries, spreading out their tax liabilities by calculating their life expectancies;
  • having more room to maneuver when it comes to arranging income options (example would be systematic withdrawals from the plan);
  • allowing the annuity owner to manage investments and withdrawals through generations.

Stretch / legacy annuities also make it possible for those companies offering these financial products to develop long term relationships with their clients because they will be dealing with existing and future generations of the original annuity owner; hence there is the favorable element of continuity.

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