Life and Death Planning for Retirement Benefits

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with payments to start at age 85, he removes $125,000 (plus the money that sum will hopefully

earn in the future) from the account balance that is used to compute his required distributions. That

should reduce his first year’s required distribution by $4,000–$5,000 he figures, saving a couple

thousand dollars of income taxes annually. True, he is just postponing the problem, since his

distributions will balloon after age 85, when the QLAC starts paying out. But by then he will be

retired, he figures, so his income tax bracket will be lower.

10.4 Annuity Payouts from Plans: Putting It All Together

Which form of benefit should the participant choose? That extremely important decision

should be made with the advice of a professional such as a financial planner or actuary. The answer

depends on a variety of factors including the participant’s health, other assets, income, and estate

planning objectives, the circumstances of the beneficiary(ies), the financial health of the pension

plan, and the degree (if any) to which the plan subsidizes one option or the other.

10.4.01

Drawback of nonspouse survivor annuities

Retirees choose a life annuity to provide for their own living expenses in retirement and

to protect against the danger of living too long, but are often loathe to accept the idea of the

insurance company’s (or plan’s) gaining a “windfall profit” if the retiree dies prematurely. To

avoid that result, a retiree may choose an annuity that provides benefits for a minimum guaranteed

term. Or the participant may choose an annuity that provides a survivor annuity to his beneficiary,

because he wants to provide an inheritance.

Providing a survivor benefit (either through a survivor annuity or through a guaranteed

term) to a beneficiary who is not a charity and who is not the participant’s spouse has gift and

estate tax consequences. The value of the survivor benefit is included in the participant’s estate

with no offsetting marital or charitable deduction. The estate tax rules for valuing annuity benefits

are considered unfavorable; see “The Booby Prize,” by Noel C. Ice and Robert W. Goff, in

Trusts

& Estates

(May 2006), p. 36. For this reason, a survivor annuity is not the best vehicle for wealth

transfer for clients with taxable estates. There may also be a taxable gift involved, if the participant

irrevocably elects a joint and survivor annuity with a nonspouse beneficiary.

The participant might better choose an annuity that provides the right level of income for

himself (and his spouse, if any). If his plan benefits would provide a larger income than they need,

the participant could take the excess as a lump sum distribution, roll that to an IRA, and leave

the

IRA

to chosen beneficiaries as an inheritance, rather than leaving them an inheritance in the form

of a survivor annuity, or a minimum guaranteed term, under the participant’s annuity. This

approach treats the annuity as something for the participant and spouse to consume during

retirement, and as longevity insurance, and uses other assets for wealth transfer.

10.4.02

Illustrations: Different choices

How do people choose among different forms of plan benefits? The best approach is to get

professional advice; see factors discussed at

Here are examples of some of the

approaches people consider.