Questions that Annuity Sellers Cant Answer

Questions

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Special Notice
Not legal advice If you encounter annuities issued prior to 1986, rules may all be different Applies to non-qualified annuities

What are Valid Conditions for 1035 Exchange

Owner, annuity, beneficiary same, maturity date same, but lots of flexibility as to type many to one one to many Partial Main issue will insurance company allow Life to annuity over looked tax benefit
(even works with term policy)

1035 Life to Annuity Tax Advantage

Case Study
Term insurance policy with $1000 cash value (the unearned premium) Policy holder has paid $50,000 in premiums over the years His basis is $50,000 so if you 1035 this into an annuity (and add $30,000 cash), the annuity basis is $80,000

Who Should be the beneficiary of an annuity

Spouse is absolute best choice (make children contingent) If no spouse, then consider what happens if contract is annuitant driven (AD) vs. Owner Driven (OD) NOT a trust, no look through provisions as with IRA beneficiaries

Who Should be the Owner and Annuitant of an Annuity?

Do everything possible to make them the same person When age is a limitation of sale or commission, think through ramifications if
Owners dies first Annuitant dies first Know if contract is annuitant driven

Non Natural persons okay as owners if agent

Whats the 59 penalty rule?

10% penalty on taxable amounts Except
Payments received because of death of the holder (or primary annuitant if holder is non-natural person) Substantially equal lifetime payments (just like IRAs) Immediate annuities

Important Definitions
Owner Driven (OD): Owners have all legal rights, and can change the designated annuitant as needed without any negative tax or penalties (except potentially at death of annuitant), as the contract specifies. OD contracts pay out only upon the death of the owner. Annuitant Driven (AD): Owners can usually be changed. It is contract specific as to whether an annuitant can be changed once the contract is issued. Also, the contract will pay out upon the death of either owner or annuitant. [In either form of contract, changes to beneficiaries (primary or contingent), may always be made.]

What are Problems When Owner and Annuitant not the Same
One case study under 4 conditions Annuitant driven annuity
Owners dies first Annuitant dies first

Owner Driven annuity

Owner dies first Annuitant dies first

Case
Case
Bob age 70 owner Mary (wife) age 55 Annuitant Children are beneficiary

OD and Owner Dies

Annuity terminates and children must distribute within 5 years or elect annuitization (within 60 days) Better structure would have been
Mary (wife of owner) as beneficiary Kids as contingent beneficiary Result= Mary could have continued Annuity

OD and Annuitant Dies

Bob may become new annuitant if contract so specifies or Bob selects a new annuitant (potential tax trap) Good idea to name contingent annuitant in original contract

AD and Owner Dies

Since all contracts are OD, the annuity terminates, beneficiaries have 60 days to elect annuitization or 5 year payout (beneficiaries exempt from 10% penalty upon death of holder) Spousal continuance only applies if spouse is named as SOLE beneficiary and contract allows for spousal continuance (sometimes if spouse is partial beneficiary)

AD and Annuitant Dies

Annuity pays out to children they decide in 60 days on payout options Owners is deemed to have given a gift to children (estate consequence if more than $11,000) Beneficiaries pay tax and also 10% penalty if under 59 (because on death of annuitant, beneficiary becomes the taxpayer)

Proper Structure Avoids

Untimely taxation Unwanted gift taxes The 10 percent IRS penalty Loss of spousal continuation

Possible solution to bad structure

1035 to another contract that is OD, same owner, annuitant, beneficiary Then, owner changes the annuitant

What is the tax impact of a change in owner?

Taxable event to owner Exceptions

Transfer between spouses Transfer incident to divorce Transfer to grantor trust (living trust)

How is loss treated if annuity surrenders for loss or sold for profit?
Ordinary loss (excluding surrender charge)
the IRS says that a loss under a variable annuity is treated as a miscellaneous itemized deduction subject to the 2% floor (others differ)

Ordinary gain

Annuity gain is Income in Respect of Decedent

Beneficiary gets a deduction for estate taxes paid by decedent as beneficiary receives payments
Example : $100,000 annuity subject to estate taxes = 45% Each portion of payment subject to income tax received by beneficiary, may take deduction of 45%

Protection
Creditor protection and bankruptcy protection are State specific States have guarantee funds that protect annuities but read that law before discussing Note that recent changes in creditor and bankruptcy protection for IRAs does NOT affect non-qualified annuities

What other agents do wrong

Sell the hottest annuity and they dont know the contract provisions. Smart agents work with 2-4 annuities and know the contract inside out Because these agents sell the product du jour and are product-centered, they never get referrals from other professionals

How to capitalize
Study these resources (next page) and know more than other agents Send the Annuity Newsletter to CPAs and Eldercare attorneys each month

Resources
Dick Duff column in SMA
RWDuffCLU@aol.com

Tax Facts www.nuco.com Tax Facts News monthly IRS updates Contract Review Service
http://www.contractstructure.com/Contract_Reviews.aspx

Advanced UW dept of insurance company

To Meet Existing Annuity Owners

Annuity Direct Marketing System
Attracts existing annuity owners User feedback 20% off code : ANN1213

To Meet Existing Annuity Owners

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Questions

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