Get The Annuity Structure Right: Owner, Annuitant, Beneficiary
New York City
Did you know that, after the death of an annuity owner, a spouse is the only person who can continue the annuity contractif, that is, the spouse is the beneficiary?
The question got some play at an annuity meeting here because, according to two panelists, many financial advisors do not know that fact or its ramifications.
Not knowing the most effective annuity structure for a client can create a lot of problems later on, cautioned Steven E. Reed, who was one of the panelists. He spoke during a breakout session on contracts at the annual meeting of National Association for Variable Annuities, Reston, Va.
Specifically, if the advisor enters the wrong name or names in the contract for the owner, annuitant, and beneficiary, the outcome can be much different than the client intended, explained Reed, who is vice president and national sales manager for Scudder Investments Annuities and Life Division in Chicago.
For example, say a husband and wife are shown on the contract as joint owners, the husband is the annuitant, and the children are the beneficiaries. If the wife dies, Scudders advanced markets unit interprets Rule 72(s) and Rule 72(e)(4)(c) of the Internal Revenue Code to mean that:
The annuitys current value will go to the children, one-half of it as a taxable death benefit. The other half that goes to the children will be treated as a “gift” from the father and thus be subject to gift taxes. The father will also have to pay income tax on the inside buildup of his half of the payout, and, if he is not yet age 59 1/2, an early distribution penalty on this amount, too.
If such outcomes were not intended when the annuity was purchased, the survivors will likely blame the rep, and disputes will follow, Reed predicted. His message: “If your reps hurt clients on these contracts, and if the disputes go to arbitration, the reps will lose every time.” Worse, “a lot of the errors and omissions insurers dont pay in such disputes,” Reed said.