Case Study: Multi-Generational Stretched Annuity

May, 2024
Case Study: Multi-Generational Stretched Annuity

When working with successful individuals on their planning, a common refrain you hear as an objective is securing a legacy for future generations.  The question is, how?

One option is the Investors Preferred NextGen Annuity. To show how this product can help fulfill the desire to create a legacy for future generations, let’s walk through a sample application.  

Meet Maria. She is 65, widowed, and the mother of two and grandmother of three.  She has an overall net worth of $60 million with a $30 million portfolio of liquid investments.  As Maria lives in California, she is subject to a high state income tax rate. In fact, her combined state and federal income tax rate is one of the highest possible combinations.

Maria is engaging in planning with an eye to creating a financial legacy for her grandchildren.  She has certain goals she would like to achieve in that process:

  • Take advantage of her remaining, unused federal unified credit.
  • Delay income taxes and receipt of taxable earnings from the investment portfolio on a tax-deferred basis over multiple generations.
  • Avoid an immediate gift or estate tax bill upon her death or the death of her two children.

A plan was formed to help Maria meet these goals.  She created a trust that complied with IRC §72(u)(1) and funded the trust with $10 million of liquid assets.  She did this utilizing her remaining federal unified credit.  

As Maria faced insurability challenges, making the purchase of life insurance either impossible or prohibitively expensive, the trustee of the trust purchased two NextGen Annuity policies with one-time $5 million premium payments for each policy.  Each of her two children was named the annuitant on their respective policy, and Maria’s grandchildren were named the ultimate annuity beneficiaries.1

Maria’s RIA was appointed by Investors Preferred to manage the NextGen Annuity policy accounts pursuant to an agreed upon Investor Policy Statement in a non-comingled Separately Managed Account (“SMA”) at a custodian (such as Fidelity or Schwab).  

Under this structure, the NextGen Annuity policy SMA can grow and accumulate on an income tax-free basis.  This means the amount ultimately payable to Maria’s grandchildren accumulates for years on a tax-free basis and will be significantly greater than without the NextGen Annuity structure.

The trustee of the trust elected lifetime NextGen Annuity annuitization over each grandchild’s life.  This allows the grandchildren, as the annuity beneficiary, to elect to annuitize the annuity account balance over their lifetime, stretching out the ultimate required payments to them as long as possible.  Any residual balance will be paid to the heirs of Maria’s grandchildren.2

The end result – Maria has met her goal of creating a financial legacy while also achieving income tax deferral of the annuity earnings for 50-70 years (or more) and avoiding gift or estate taxes.

Please see our full disclosures here.

For financial advisor use only. This material is based upon information generally available to the public and from third party sources believed to be reliable. Investors Preferred does not independently verify any of the information it receives. Investors Preferred gives no representations or warranties as to the accuracy of such information and accepts no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission, or inaccuracy in such information and for results obtained from its use. Information is as of the date indicated and is subject to change without notice. This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. These materials should only be considered current as of the date of publication without regard to the date on which an individual may receive or access the information.

Please reach out anytime.

  1. 1 Regardless of whether there is a single annuitant or a joint annuitant in G2, under IRC §72(u), the death of any holder(annuitant) triggers the distribution requirements of the beneficiary.
    2 If elected, G3 received a lifetime payout underIRC §72(h).  Lifetime payments are partially taxed at ordinary income rates via an annuity exclusion ratio where a payment is considered part income and part return of investment in the PPVA[IRC §72(s)(1)].  If an election is not made, then 5 years of annuity payments are made.  A beneficiary may also elect to take a single, lump-sum payment at any time.

Contact Us

Thank you! Your submission has been received!

Oops! Something went wrong while submitting the form