What you need to know about variable annuities in trusts

In a previous LifeHealthPro article I discussed the potential benefits of using variable annuities (VAs) in trusts.

This article provides additional details on structuring such an arrangement.

Scenarios

In its presentation, “Advanced Techniques: Using Trusts with Annuities,” Jefferson National points to four trusts that can benefit from VAs’ tax-optimization. 

As noted in the presentation: “In most states, the undistributed gains inside of an annuity are not defined as trust income, and therefore do not have to be distributed currently to the income beneficiaries.”

Specifically, here are the four trusts from the presentation:

The details of each trust’s purpose and setup are beyond the scope of this article.

Regardless of the trust type, however, a key reason for a VA investment is to increase control over the timing of trust income and taxation.

Mechanics

The VA contract requires an owner, annuitant and death beneficiary. In many cases, the trust can be both the contract’s owner and beneficiary in each of the trusts listed above.

The logic behind having the trust as beneficiary is that it is the trust document that directs how the assets should be used, says Kevin Sullivan, chief of sales at Jefferson National in Louisville, Kentucky.

“By naming the trust as beneficiary you ensure that the assets, even upon distribution, will be given back to the trust and they will be then aligned and distributed out according to the trust documents,” he says.

“If you were to pass those out to the beneficiary you’re removing those assets outside of the trust…It’s not something that you have to do, but it’s a way to retain that same level of control that you were trying to obtain when you created the trust document.”