Annuity for a Child

[axeman462]

So I was considering giving my nephew money for Christmas this year, because the kid has basically everything else he could possibly want. My wife and I were playing around with different ideas, 529 plan, Treasury bonds, CDs etc...

I was thinking about an annuity, reason being because it wouldnt limit him to only using it toward education like a 529 plan would (maybe he can use the money to start a business later in life(Or let it grow for retirement)). And the interest yield would be significantly higher than a CD or a T Bond

One reason I was leaning toward an annuity for him is because I vaguely remember during training at Bankers when I was there them mentioning something about a "Uniform Gifts to Minors Act" If I remember right, this makes the 10% tax penalty exempt if the monies are used for education costs?

But anyway, i was thinking starting an annuity over time and talking with his parents about funding it would be a good way to help the kid get a head start in life, and have options with the money (start a business, down payment for a house, or education costs etc..)

Any opinions on the pros or cons for an annuity for a child? Or better ideas?

 

[pcbinsurance]

Why not consider setting up a Whole life policy for him?

 

[DHK]

One reason I was leaning toward an annuity for him is because I vaguely remember during training at Bankers when I was there them mentioning something about a "Uniform Gifts to Minors Act" If I remember right, this makes the 10% tax penalty exempt if the monies are used for education costs?

Normally, I wouldn't dare reference an "ehow" website, but this answer makes a lot of sense:
Can a Minor Child Have a Deferred Annuity? | eHow

Is an Annuity the Right Product?

When you put funds into an annuity, unless the child takes a substantially equal payment based on his life expectancy every year or becomes disabled, there's a penalty if he removes the funds before age 59 1/2. Some parents realize this and simply want their children to have funds for retirement. In that case, the deferred annuity may be the best possible product.

Based on past threads (and since you mentioned it) I'd be very suspect of training received from Banker's Life.

I also double-checked with IRS Publication 575. Nothing about an 'education exemption' is listed to avoid a 10% withdrawal from a non-qualified annuity contract.

http://www.irs.gov/pub/irs-pdf/p575.pdf

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Now, if you funded an IRA for the child using an annuity as a funding vehicle... THAT would avoid the 10% penalty if the proceeds are used for qualified education costs.

I can't recall if a minor can own an IRA or not. You might want to check with the annuity carrier you're thinking of.

 

[Norwayguy]

Normally, I wouldn't dare reference an "ehow" website, but this answer makes a lot of sense:
Can a Minor Child Have a Deferred Annuity? | eHow

Based on past threads (and since you mentioned it) I'd be very suspect of training received from Banker's Life.

I also double-checked with IRS Publication 575. Nothing about an 'education exemption' is listed to avoid a 10% withdrawal from a non-qualified annuity contract.

http://www.irs.gov/pub/irs-pdf/p575.pdf

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Now, if you funded an IRA for the child using an annuity as a funding vehicle... THAT would avoid the 10% penalty if the proceeds are used for qualified education costs.

I can't recall if a minor can own an IRA or not. You might want to check with the annuity carrier you're thinking of.

The IRA holder must have earned income.

 

[briko3]

Over funded IUL. .....

 

[DHK]

SPWL?

Growth would still be taxable, but no further premiums due, has a higher life insurance benefit, and no 10% penalty on withdrawals.

In short - same benefits of an annuity, but no penalties prior to age 59 1/2. (Oops. Got this one wrong... see later post.)

Also, while I'm sure the amount won't be huge... it's still an exempt asset when it comes to applying for college federal financial aid.

 

[Tahoe Ray]

SPWL?

Growth would still be taxable, but no further premiums due, has a higher life insurance benefit, and no 10% penalty on withdrawals.

In short - same benefits of an annuity, but no penalties prior to age 59 1/2.

Also, while I'm sure the amount won't be huge... it's still an exempt asset when it comes to applying for college federal financial aid.

MECs have a 10% penalty, no?

 

[DHK]

You're right.

Insurance: Avoiding The Modified Endowment Contract Trap

Taxation of MECs
Any loans or withdrawals from a MEC are taxed on a last-in-first-out basis (LIFO) instead of FIFO. Therefore any taxable gain that comes out of the contract is reported before the nontaxable return of principal. Furthermore, policy owners under the age of 59.5 must pay a 10% penalty for early withdrawal.

I don't do too much planning in the name of minor-age children, as you can tell.

Okay, I'm out of insurance-based ideas now.

How about a US Savings Bond? They grow tax-deferred too. And they are a classic savings method for parents/grandparents.

http://www.savingsbonds.gov/indiv/planning/plan_gifts.htm

 

[axeman462]

You're right.

Insurance: Avoiding The Modified Endowment Contract Trap



I don't do too much planning in the name of minor-age children, as you can tell.

Okay, I'm out of insurance-based ideas now.

How about a US Savings Bond? They grow tax-deferred too. And they are a classic savings method for parents/grandparents.

Individual - Savings Bonds As Gifts

yeah, we are probably just going to do a US savings bond we were just hoping for something with a little bit more year old then a savings bond. We had considered doing some kind of whole life insurance but do not want to leave the parents with a monthly bill every month.

 

[VolAgent]

yeah, we are probably just going to do a US savings bond we were just hoping for something with a little bit more year old then a savings bond. We had considered doing some kind of whole life insurance but do not want to leave the parents with a monthly bill every month.

Surprised DHK missed this. Premium deposit account.

Some companies will allow you to deposit all the premiums at once and they will then make annual premium payments from that account. It does earn interest, which is generally minimal and is subject to income tax. I seem to recall one company giving you a discount on future premiums instead, which I believe avoided taxable interest. I won't swear to it.