Would you like to leave a legacy to your children, grandchildren or other loved ones? A trust fund will accomplish that, but you’d likely need to hire a lawyer to draw up documents. There also may be ongoing management fees that will reduce the amount your heirs will receive.
Unless you’re leaving a vast estate, a trust fund is likely overkill. Simpler, cheaper ways to leave a defined legacy include cash-value life insurance, a 529 college savings plan and annuities. All three have their advantages, but this article will focus on how different types of annuities can fund your legacy.
Income annuity keeps on giving
One of the better options, a lifetime deferred income annuity, is often overlooked. It’s the only gift guaranteed to keep on giving for a lifetime. The vehicle converts a cash deposit into a stream of future income, much like a private pension.
Here’s how it would work using a grandchild as an example. (It would work the same way for a child.) You would buy a lifetime annuity—also called a deferred income annuity—for your grandchild. It defers income payments until a future date that you choose.
Let’s say your granddaughter is 10 years old. You make a $100,000 deposit. You decide to have payments begin when she reaches age 25 and continue for the rest of her life. There won’t be the normal 10% penalty the IRS levies on interest withdrawals before age 59½ because there’s an exemption for systematic distributions over life expectancy.
As of mid-September 2026, one top insurer will guarantee a payment of $1,229.71 per month, with $1,083.37 of it taxable. If your grandchild lives to age 85, she will collect $885,391, including $785,391 in taxable interest plus tax-free return of the $100,000 of principal, over the payment term.
It’s foolproof
An income annuity has no cash surrender value. Your grandchild or child won’t be able to blow the money on a fancy pickup truck or lavish vacation. And since he or she will receive a check from you every month, you’ll be remembered fondly.
If you choose annual payments, you might have the electronic or paper check arrive each year on your grandchild’s birthday or on Christmas, Hanukkah or another holiday.
The checks can increase if you add an inflation-protection rider so that the amount will go up over time. This option will help the recipients retain future purchasing power. However, it will reduce the initial payments.
Another advantage is tax efficiency. When income is received, only a portion of it will be taxable. This is because part of the income from this type of annuity is considered to be a return of principal and part is considered to be earnings. While earnings are taxed, return of principal is not. Once all principal has been repaid after many years, the payments will be fully taxable.
Guaranteed annuities with cash value also work
The drawback of an income annuity is that because there’s no cash value, the child or grandchild can’t tap it to pay for education or a home or anything else. Three types of deferred annuities—variable, fixed-rate, and fixed-indexed—do offer cash value as well as income options.
Variable annuities offer growth potential but are not principal-guaranteed, so we’ll focus on the other two varieties.
Multi-year guarantee annuities (MYGAs), the main type of fixed-rate annuity, behave much like a bank certificate of deposit (CD), paying a set, guaranteed interest rate for up to 10 years. Interest is tax-deferred until withdrawn. Most MYGAs allow penalty-free withdrawals, sometimes up to 10% of the policy value annually.
Fixed-indexed annuities pay interest based on the performance of a stock-market index, giving policyholders a portion of the index return. So they offer more growth potential than MYGAs. However, when the market is down for the year, they normally pay nothing but never decrease in value. Therefore, the interest rate fluctuates markedly from year to year. Indexed annuities usually also allow penalty-free withdrawals of a portion of the policy value.
Tax matters
To avoid tax problems, the child or grandchild should be listed as the primary beneficiary, not the owner of the policy. Then, upon the death of the policyholder, the contract value will be paid out as a death benefit and won’t be subject to the 10% IRS early withdrawal penalty. They will still owe standard income tax on the untaxed gains.
The beneficiary can receive a lump sum, but some insurers will charge surrender penalties and market-value adjustments for a full death-benefit payment if the contract is still subject to an early surrender penalty. Other options for the beneficiary typically include various monthly payout options, such as lifetime payments.
An insurance company cannot pay a deferred annuity’s death benefit directly to a minor. To name a minor as a beneficiary, specify a Uniform Transfers to Minors Act (UTMA) account, which designates a trusted adult custodian to manage the funds until the child reaches legal adulthood. An UTMA is easy to set up.
While others may give gifts that are soon forgotten, providing those loved ones with an ongoing gift of income that will last for the remainder of their lives will ensure that you have created a legacy for yourself as well as a nice financial cushion for the younger generation of your heirs.
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Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and income annuities. Ken is a nationally recognized retirement-income and annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available from AnnuityAdvantage, which also offers an income-annuity quoting service. There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.
