Some Pitfalls To Avoid In Annuity And IRA Planning

Some Pitfalls To Avoid In Annuity And IRA Planning

By

Careful planning goes a long way toward helping protect financial assets for a client’s heirs. Unfortunately, critical details may be overlooked if the planner is not sensitive to the potential for pitfalls.

The following examples illustrate the failure to maximize the advantages of 2 forms of personal retirement plans nonqualified annuities and individual retirement accounts (IRAs) along with tips on how to avoid them.

Example: Establishing a deferred annuity with joint annuitants may set the stage for the unintended disinheritance of a spouse.

In the case of some deferred annuities, the annuitant is just the individual (or individuals) upon whose life annuity payments are based when they involve a life expectancy. Unfortunately, the term “joint annuitant” can be misunderstood as providing survivorship rights.

The proper approach is to use the beneficiary designation to grant such rights.

To illustrate, assume Mrs. J buys an annuity to accumulate tax-deferred interest on her savings until she retires. The funds represent a significant part of retirement savings for herself and her husband. As owner, she names herself and Mr. J as joint annuitants under the mistaken belief that the proceeds will be available to Mr. J at her death. She designates their son as primary beneficiary, thinking that he will receive any remaining amounts after she and Mr. J are both deceased.

Although Mrs. J’s plan for the future is clear, she would be shocked to see the actual results. Under this arrangement, at Mrs. J’s death, the proceeds of the annuity would go to her son, not her husband. Mr. J effectively would be disinherited.

Planning tip: In circumstances similar to these, name the spouse as the primary beneficiary, and name the child as contingent beneficiary. As primary beneficiary, the surviving spouse automatically becomes the new owner of the annuity, and any gain in the account can remain income tax-deferred. There is no need to name a joint annuitant under a deferred annuity. Such an arrangement generally is not made until annuity income payments begin (annuitization).

Example: Joint ownership of a deferred annuity also has no influence on the disposition of the contract in event of death.

Under some deferred annuities currently being sold, the death of a joint owner is treated as the death of the owner, and proceeds are payable to the beneficiary, not the surviving joint owner.

Joint ownership may be appropriate in certain situations, of course. For example, where 2 individuals have contributed to purchase the deferred annuity, it may be important to require both signatures whenever a withdrawal, change of beneficiary, or other transaction is to be made. Joint ownership may thus serve to help safeguard the annuity from reckless spending. In such cases, the primary beneficiary designation should be the survivor of the joint owners (e.g., “the survivor of Mr. J and Mrs. J”).

Planning tip: Use the beneficiary provision to pass on a deferred annuity. Here’s a simple way to satisfy the client’s needs in the prior example. The proceeds under this arrangement go to the children only after both spouses are deceased.