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Annuities
In General
Internal Revenue Code Issues
Limitations on Distribution Options
Changing the Beneficiary Designation
Available Forms
Additional Documents Required
Special Funding Considerations:
Ascertain
Whether an Annuity is Collateral for a Loan
Use of Durable
Special Power of Attorney
IMPORTANT NOTICE TO USERS:
The information contained in this legal bulletin is general in nature and
does
not constitute legal advice. Non-attorneys should consult
with a qualified estate planning attorney regarding any trust funding matter.
Issues of state law may contradict any information contained herein.
Accordingly, the information contained in this legal bulletin and on our web
site should not be relied upon without first confirming with a qualified
attorney that the legal requirements in a particular state are satisfied.
This web site, our products and services, and any accompanying resources
are
not intended to be a substitute for research, continuing legal education, or a
thorough knowledge of the law. In using any aspect of this
web site, the user, whether attorney or non-attorney, agrees to assume all
responsibility for the validity of the information contained herein.
In General: An annuity can be either commercial
or private. A Commercial Annuity is a contract entered into with a company that
sells financial products. The annuity contract of a commercial annuity provides that
the company will be obligated to make payments to the beneficiary for a specified period
of time. The time period may begin immediately or it may not begin until some future time.
Additionally, some commercial annuities will provide benefits after the death of the
owner. Thus, when funding a commercial annuity, both the lifetime beneficiaries and the
after death beneficiaries will need to be funded.
A Private Annuity is also a contract to make payments for a
specified period of time; however, it is entered into between individuals and the payment
obligations cease at the death of the recipient. Because payments only occur during the
lifetime of the recipient, the private annuity does not have any death benefits that need
to be funded. Accordingly, when funding a private annuity, only lifetime benefits can be
funded. The private annuity lifetime payments are funded by utilization of
a legal "assignment." CAUTION:
If you are not certain of your annuity
type or you need assistance is obtaining a legal assignment, we strongly
recommend that you consult your estate planning attorney.
Internal Revenue Code
Issues: Due to restrictions contained in the Internal Revenue Code, changing
ownership of an annuity into the name of a revocable living trust is generally not
recommended. Internal Revenue Code § 72(u) requires that all annuities be held by a
natural person. Although this would appear to be an effective limitation on funding, many
companies (and many legal commentaries) have taken the position that a revocable living
trust meets the requirement of a "natural person" set forth in the Code.
A recent IRS Private Letter Ruling would support the argument that a trust would
qualify. However, IRS Private Letter Rulings are only binding upon the tax
payer that requested the ruling. Thus, it may be better to error on the
side of caution. CAUTION: Because of
the uncertainty in the IRS code, we strongly recommend that you seek customized
legal counseling from your estate planning attorney.
Limitations on
Distribution Options:
Changing the owner of the annuity to the trust may also
impact on what distribution options are available under the annuity contract.
Some annuity
contracts provide that only a spouse or child of the annuity owner may select between
different distribution options. Accordingly, if a trust is named as the beneficiary, the
trust may only be able to select from a limited number of distribution options.
However, it may be better to error on the side of caution.
The most
conservative funding option available is to change the beneficiary designation to name the
living trust as the primary beneficiary without changing the ownership of the Annuity.
CAUTION: Because of the nuances
associated with annuities, we recommend that you
seek the guidance of your estate planning attorney.
Changing the Beneficiary
Designation:
A beneficiary designation of an annuity is changed by:
-
Sending an instruction letter signed by the annuitant;
-
Completing the annuity company’s Change of Beneficiary
Designation
form*
signed by the annuity owner(s) and sending it to the annuity company;
-
If the Change of Beneficiary Designation form requires a witness or notary, make
certain that the appropriate formalities are followed;
-
Sending the required documentation evidencing the existence of the trust.
*
For assistance in obtaining an annuity company's Change of Beneficiary
Designation form, contact your estate planning attorney. Your estate
planning attorney can assist you in determining what trust documentation is
required to send with the company form as evidence for the existence of the
trust.
Additional Documents
Required:
Many institutions may request verification that the trust is
actually in existence. Generally, including a copy of an Affidavit of Trust or the pages of the trust reflecting
the name and current trustees and the signatures will satisfy most institutions.
To ascertain what trust documents are required by various annuity companies, we
recommend that you seek counsel from an estate planning attorney with experience
in trust funding.
Special Funding
Considerations:
Ascertain
Whether an Annuity is Collateral for a Loan:
From time to time, clients
borrow money from financial institutions. The loan may take many forms including an
educational loan or line of credit. Frequently, financial institutions
require a
borrower to name the financial institution as the beneficiary of the annuity as collateral
for the loan. CAUTION: Under these circumstances, changing the beneficiary designation may result
in acceleration of the loan repayment. Because of the potential
consequences of these complexities, we strongly recommend that you seek
counsel from your estate planning attorney.
Be certain your estate planning attorney contacts the lender directly to ascertain what actions they will take if
the beneficiary designation is changed to the trust. Lenders may release their interest in
the annuity depending on how much of the loan has been repaid. Other lenders may require
the old loan to be replaced with a new loan naming the living trust as the borrower.
What
action the lender takes will often depend on whether there has been a change in interest
rates. Regardless of what option the lender accepts, they will most likely insist on
reviewing an entire copy of the trust agreement to ascertain whether there are any
restrictions in the trust document which prevent encumbering the trust property.
Be advised that there may be additional expenses charged by the lender
for reviewing the trust document or preparing/reviewing an assignment to the trust.
You should be prepared to assume any additional expenses associated with
reviewing a trust document or preparing an assignment to the
trust. Your estate planning attorney can assist you with
facilitating this process.
Use of
Durable Special Power of Attorney:
If the annuity company will not allow the trust to
be named as a beneficiary, consider having your attorney create a Durable Special Power of Attorney to
control the payment of proceeds in the event the annuitant is completely incapacitated.
If
a power of attorney is utilized, consider having your estate planning attorney
send a copy of the power of attorney to the
annuity company asking them to agree in writing that they will honor the power of
attorney. CAUTION: Often power of attorneys are never submitted to an annuity company until after
the maker is incapacitated. Once incapacitated, there is little that can be done short of
initiating a probate proceeding. For assistance in obtaining a Durable
Special Power of Attorney, we recommend that you consult your estate planning
attorney.
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