Titling Considerations for Non-Qualified Annuity Contracts
THREE PARTIES TO AN OWNER DRIVEN ANNUITY
- OWNER: Holds legal title of the contract and is responsible for all tax obligations related to the annuity. The owner holds all legal rights over the annuity, including the power to request withdrawals, elect optional benefits, name the beneficiary, and make changes to the account. The owner may be up to two individuals (natural owners) or a non-natural owner (like a trust or business).
For a natural owner (i.e., a person) the death of the owner triggers the death benefit payout
Non-natural owners who are holding the contract for the benefit of a natural person do not receive tax deferral on gains. Under IRC section 72 (u) the annual gains are considered taxable income even if they are not distributed.
- ANNUITANT: Income payments are based on the annuitant’s life. The annuitant holds no legal rights over the annuity and cannot make changes to it.
During the accumulation phase, death of the annuitant with a natural owner does not trigger a death benefit —the owner can name a new annuitant. For a non-natural owner (e.g., trust), the death of the annuitant triggers the death benefit.
- BENEFICIARY: Receives the death benefit payment upon the death of the owner. Beneficiaries are prioritized as follows.
- Primary beneficiary1
Note: Joint owners should be designated as the primary beneficiary(ies) to ensure they will inherit annuity proceeds before any contingent beneficiary. Naming an alternate primary beneficiary could result in the unintended payout of the death benefit.
- Contingent beneficiary
- Primary beneficiary1
WHAT CHANGES CAN BE MADE TO THE PARTIES POST CONTRACT ISSUE2
- Non-taxable ownership changes: a change in ownership to the owner’s grantor trust, to a spouse or to the spouse’s grantor trust does not result in immediate tax consequences. The spouse or trust assumes all rules and rights of the initial contract. The original owner’s cost basis carriers over to the new owner and they can collect all remaining payments and choose a new beneficiary.
- Taxable ownership changes: when ownership of a deferred annuity is changed to a person or entity other than described above, the transferred amount (account value) is treated as a distribution for tax purposes. The original owner is taxed on any previously tax-deferred gain and may be subject to an IRS 10% penalty for premature distributions. The new owner’s beginning cost basis is equal to the account value.
OPTIONS FOR DEATH BENEFIT PROCEEDS
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