You bought your annuity because of its competitive return, tax-deferral, and safety. And you probably spent time with your advisor reviewing several options. But how much thought did you give as to who should be the “parties” to your annuity. If you’re not sure why you made the choice you made, now may be a good time to dust off that annuity contract and take a closer look.
There are four parties to an annuity contract: the insurance company, the owner, the annuitant, and the beneficiary. The contract can be owner-driven, annuitant-driven, or a combination of both. With an owner-driven annuity, death benefits are paid when the owner dies. And an annuitant-driven contract will pay the beneficiaries upon the death of the annuitant. In either type though, the funds must be distributed when the owner dies, which may present undesirable consequences.
Why does it matter?
Let’s say that you have an annuitant-driven annuity. You and your spouse are joint owners; your spouse is the annuitant, and your two children (both under 59½) are the beneficiaries. What would happen if your spouse dies? You might think that you’ll keep control of the money and everything will stay the same. Wrong! The kids will get it—all of it. Then to make bad things worse you’ll pay income tax on your part of the tax-deferred growth and possibly gift tax on any amount over $11,000 that you pass to each of your children. Plus your children won’t be too happy either because they’ll owe income tax on your spouse’s portion of the annuity’s gain.
So how is your annuity contract structured? It should be arranged in a way that can result in the least amount of taxes and penalties on the death benefit, plus allow maximum flexibility on those distributions.
Many annuity owners have never had explained to them who should be the annuitant, owner and beneficiary and how their living trust might impact these choices. A simple annuity can quickly get complex. But it’s wise to pay attention to these details to avoid a negative outcome at the worst time.
Is your annuity designed with the right parties in place? There are resources available, including a free report we use titled “Annuity Owners Mistakes “, that can help you decide if you want to have your existing annuity reviewed and find out what changes can still be made.
