• Starting annunities and creating irrevocable trusts are decisions that cannot be reversed.Michael Hitoshi/Digital Vision/Getty Images
  
  Single Premium Immediate Annuities (SPIAs) and Irrevocable Life Insurance Trusts (ILITs) have specific functions. SPIAs convert life-long savings or other lump-sum cash sources into a fixed or variable stream of income that cannot be outlived. ILITs protect life insurance proceeds from estate tax by transferring ownership of new or existing policies to an independent trustee. Unfortunately, these financial tools share potentially adverse characteristics that should be carefully evaluated before using either of the them.
  
  

Common Problems

• Both strategies are irreversible. Once the annuity begins periodic payments, the customer loses the right to get his money back. On a case-by-case basis, insurance companies may make exceptions for hardship. Similarly, insurance policies, cash or other valuable assets placed in an irrevocable trust may not be withdrawn. Accumulating values in the immediate annuity and irrevocable trust cannot be borrowed or otherwise accessed and owners lose control of their assets once they are transferred to the SPIA or ILIT.
  
  

Other Problem Areas

• Even though family sentiments may change, the original beneficiary selections are permanent in an ILIT. Another issue may be cost. According to The Rushforth Firm, Ltd., attorney's fees for creating an irrevocable trust can vary from $1,500 to $3,000. In addition, trust management fees are paid to an independent trustee. With immediate annuities, named beneficiary interests are indeterminable because they depend solely on the settlement option selected at the time of issue. For example, if the annuitant selects a Life with 10 Year Period Certain, the beneficiary will receive no death benefit if the annuitant lives for 10 years, but if he dies after 5 years, the beneficiary will receive the same periodic payments for the remaining 5 years. Because of this uncertainty, immediate annuities are not good wealth transfer vehicles for beneficiaries.
  
  

Principal Concern

• The overriding issue with SPIAs and ILITs is their inherent inflexibility in the face of participant changing circumstances. That's because these two financial instruments were designed to accomplish specific tasks. In effect, the insurance company is hired to provide a fixed or variable stream of income in exchange for a single sum deposit which now belongs to the insurer. In the case of a ILIT, the creator of the trust, the settler, hires a trustee to manage and distribute assets in accordance with an agreement drawn by an attorney. The settler relinquishes ownership of the assets in the trust to avoid paying estate tax at death. The rigidity of these valuable tools permits them to successfully perform their designed tasks.