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Retirement Planning > Retirement Investing > Annuity Investing

Annuity Titling and Beneficiary Designations: Structure Mishaps, Miscues and Misfortunes

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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Is outdated, inappropriate or incorrect nonqualified annuity titling now a depth charge that is just below the surface of your book of business?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or beneficiary designations do not conform to the specific requirements of the nonqualified annuity contract, or are out of date for annuities owned by your clients based on their current distribution plans.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marital status or particular situation, will act to render nonqualified annuity ownership and beneficiary designations outdated and very often improper for achieving client objectives.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

–Beneficiary death

–Birth or adoption

–Substantial estate value change

The occurrence of any of these events could suggest that a change in contract titling is indicated.

Miscue Myopia? Avoid an Ostrich Outlook

If annuities are part of a recommendation for meeting client retirement objectives, financial professionals want to be certain to address annuity structure — at the time of sale and issue of the annuity contract, and in the future. Too often, it can be tempting to adopt an “ostrich outlook,” burying heads in the sand when it comes to an unfamiliar subject matter area such as contract titling, while hoping intently that any structuring problems will either go away or never see the light of day. But treating an annuity-structure issue as though it does not exist could wind up being unproductive, time-consuming and expensive for both the annuity owner and for the financial professional working with the owner.

Annuity contracts vary widely from company to company, and annuity products issued by the same company can have different death benefit payout provisions and structuring rules. The heads-up approach is to be aware of the basic information required to be knowledgeable about this important topic.

Know the terms of annuity contracts you recommend and sell, and how they affect the operation of these annuities.

–Learn how tax law affects the operation and taxation of an annuity, in both its accumulation and distribution phases.

–Be aware of exactly what distribution methods will be available or required at the death of an owner or annuitant.

–Determine whether the ownership structure and beneficiary designations established when the annuity was issued reflect the owner’s current distribution objectives.

It is important for financial professionals, their clients and their client’s families to stay on top of this information. Knowledge is power — the power to assist clients to the best of a representative’s ability, and to help protect clients against unanticipated and unpleasant surprises, like those that can be caused by incorrect nonqualified annuity titling and improper beneficiary designations.

Hero Time: Avert Misfortune, Improve Prospects

Reviewing annuity titling is more than simply playing defense. Annuity structure reviews may also uncover other risk management and longevity planning needs. The likelihood of identifying a potential hidden client need, objective, concern or problem provides another excellent reason to contact clients and demonstrate a consultative approach to the delivery of financial services, and an approach that enhances the service provider’s effectiveness, value, image and professionalism.

In addition, if a client has experienced a life event change affecting her contract structure, the financial professional can use this opportunity to address a potential area of concern needing attention that the client may not even know existed. Doing so can serve to make the financial professional a hero in the eyes of their annuity contract owner client.

Regular beneficiary reviews add value to a client relationship. They help assure that the relationship is not jeopardized by a potential unwelcome future financial surprise, one that easily could have been avoided by taking action now to meet with clients and prospects for an annuity structure discussion and review.

Annuity structure reviews can also be a springboard for examination of titling of other plans and products — in particular, financial products purchased before the beginning of the current advisor-client relationship. This may call for a review of information about all of a client’s retirement accounts, allowing advisors the ability to gain a better understanding of a client’s overall financial picture. The result may be additional opportunities to provide assistance with other assets and other financial needs.

In today’s world, life grows busier and more complex each day. This fact is what may make scheduling and performing a nonqualified annuity titling checkup difficult — but highly necessary. Financial professionals must make the time to review this pressing matter with each of their clients. The opportunity to prevent mishaps, avoid miscues and avert misfortunes is too important to delay.

Charles D. Osmond, JD, CLU, ChFC, is an advanced markets attorney for W&S Financial Group Distributors, the wholesale distribution agency for annuities and life insurance within Western & Southern Financial Group.


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