Immediate Annuities Serve High-Net-Worth Clients: Tax Attorney

Some wealth advisors turn red, white or gray at the thought of their high-net-worth clients buying annuities.

For high-net-worth clients, the concern is that annuities create taxable income. The last thing most wealth advisors want is to increase their clients’ tax bills.

Jack Elder, a tax attorney who serves as the senior director of advanced sales at CBS Brokerage, believes that wealth advisors should consider using immediate annuities to clients and their families rather than tapping invested assets for the cash needed to cover their “MUG”: mortgage, utility and grocery costs.

If clients have more protected income from sources such as pension plans, Social Security and annuities, “they don’t need to consume their assets under management to support their lifestyle,” Elder said in an email interview. “If they allow their managed assets to compound without spending them down, legacy assets are increased.”

What it means:  Even HNW clients need a stream of income they can use to pay the bills.

Single-premium immediate annuities:  A single-premium immediate annuity, or SPIA, is a product that converts one big pot of cash into a stream of guaranteed income.

The bucket: For some HNW clients, Elder said, putting annuities in the “bucket” for the fixed income part of the portfolio can generate the steady income the clients need to cover costs without raiding the legacy assets.

“By mitigating the need for large portfolio withdrawals, an immediate annuity can allow a family’s wealth to grow more efficiently,” Elder said. “This growth translates into a substantial increase in the value of assets passed on to heirs.”

The analysis: Elder said wealthy advisors need to work carefully with insurance advisors and tax advisors to see whether an annuity, or any other option, is the right solution for a given HNW client.

The analysis should include the client’s personal financial goals, asset mix and long-term objectives, he said.

“There is no ‘one-size-fits-all’ solution for HNW individuals and their families,” he said. “Conversations between advisors and clients on immediate annuities involve a lot of subtleties. It all comes down to the math, ensuring the proper amount of funds are allocated to an immediate annuity that will help increase a HNW individual’s AUM year over year, through their retirement. If the math isn’t right, this investment tool can be counterproductive.”