Did you know that more than one-third of nonqualified annuities are improperly titled?
In 2004, in what appears to be the most recent examination of the topic, Advanced Sales & Marketing Corporation studied retirement annuity ownership arrangements, beneficiary designations and contract terms. This research found 38% of nonqualified annuities were not set up to pay their death benefit to the intended party at the death of the owner or annuitant.*
Is outdated, inappropriate or incorrect nonqualified annuity titling now a depth charge that is just below the surface of your book of business? This may very possibly be true, if ownership titling or beneficiary designations do not conform to the specific requirements of the nonqualified annuity contract, or are out of date for annuities owned by your clients based on their current distribution plans.
This is not a matter of small importance. Property owners understand that title searches and title insurance help protect their interests in real estate holdings. Current and correct titling can likewise help preserve and protect the interests of the various parties to a nonqualified annuity contract.
Trouble arises when contract titling does not keep pace with changes that have taken place in the annuity owner’s life. For example, changes in the total current value of a client’s assets, or in her marital status or particular situation, will act to render nonqualified annuity ownership and beneficiary designations outdated and very often improper for achieving client objectives.
The best approach with clients is to stay current, look ahead and proceed with caution. Changes in circumstances and relationships very often create unintended and potentially explosive consequences that are in danger of detonation when it comes to the timing and taxation of the payout of nonqualified annuity proceeds.
Titling Mishaps … Waiting to Happen
The fact that more than one in three annuities is improperly structured is both a real and startling statistic. And the consequences can turn a contented client relationship into a contentious situation. Unfortunately, such situations often come to light only when it is too late to defuse them.
This is why annuity ownership and beneficiary designations should be reviewed and confirmed with the annuity owner on a regular and ongoing schedule. It is especially important to review such information after the occurrence of a major life event affecting individuals named as an owner or designated beneficiary, or ones who should be added or removed as an owner or designated beneficiary.
Let’s look at an example of poor nonqualified annuity structuring, what happened at the death of a party to the annuity contract, and how the unintended distribution problem could have been avoided.
Spouses Mary and Larry bought a nonqualified annuity for their use while both or either of them lived. Larry was named as the annuitant, the annuity was owned jointly, and Mary and Larry’s son Max was named as its beneficiary. The terms of the annuity contract required that, for a “spousal continuation” option to be available to a surviving spouse, one spouse needed to be named as both the annuity owner and annuitant, and the surviving spouse was to be named as the sole annuity beneficiary. This contract also required jointly owned contracts to pay the annuity benefit to the beneficiary at the death of either of its two joint owners.
At Larry’s death, the annuity death benefit was paid to son Max, and was not available to Mary, contrary to what had been the couple’s intent when they purchased the annuity.
“Spousal continuation” allows a properly structured annuity to be continued by the surviving spouse of a deceased owner. This means the annuity issuer is not required to pay the contract death benefit to the surviving spouse of the deceased owner. The surviving spouse, if named as the annuity beneficiary, may elect to receive any of the death benefit payout options, or she may choose not to receive a death benefit payment. Instead, she can choose to “continue” the annuity contract in its tax-deferred accumulation mode, and become the new owner and annuitant of the contract.
It is very important to know the appropriate annuity ownership structure, proper beneficiary designation, and who must be named as the annuitant under the terms of the specific annuities you recommend and sell. Structuring a nonqualified annuity properly to allow a surviving spouse to maintain her right to continue the contract at the first spouse’s death, if she cares to do so, provides the most flexibility and broadest number of planning options to a surviving spouse.
Performing an annuity titling review is a relatively simple process, and can be done either in person or by phone. The titling review discussion may require just a few minutes. A titling review can begin by asking the client if any of the following life events have occurred since an annuity contract was issued:
–Marriage or divorce
–Birth or adoption