Friday, September 1, 2006

Annuities: Tricks and Traps

Annuities present some unique opportunities for your clients.  But for the unwary agent and client, they also present some dangerous pitfalls.  The Annuity enjoys its own multiple-page, multiple-subsection, provision in the Internal Revenue Code.

Annuities afford clients a way to “park” assets and let them grow tax deferred.  One of the most important aspects, therefore, is to make sure they maintain their tax-deferred status.  The tax code is very specific about the limited instances in which a Trust can be the owner of an annuity.  Generally, qualified retirement plan trusts and Grantor Revocable Trusts are the only ones which will not cause an annuity to lose its tax exemption.  Therefore, when using estate planning trusts as owners of an annuity, care must be taken to consider the consequences of the death of the grantor.

An annuity is a contract.  The tax code allows the contract to be structured in a way that causes deferral of taxation of growth.  But each annuity contract is created by the underwriting company.  Thus, the options available to the owner and/or beneficiary, and the consequences of either changes of ownership, or death of the owner and/or annuitant can vary from contract to contract.  Not knowing what those options and consequences are can come back to “bite” the advisor (as well as her/his client).

Some annuity contracts do not directly address what happens in certain circumstances.  Take, for example, an annuity in which the annuitant is someone other than the owner and beneficiary.  What happens if the owner of the annuity dies, but the annuitant and beneficiary are still living.  In one case I am aware of, though the contract did not address this issue, the issuer took the position that the annuity could only be transferred from the deceased owner’s probate estate, to his heirs.  One of the “selling” points of an annuity contract is generally its transfer-on-death character, usually avoiding the need for probate.

Another common concern involves how an annuity will be treated in the event the owner is required to go into a long-term care scenario.  For purposes of qualifying for Medicaid, annuities are usually countable assets.  Medicaid exempts only very specifically structured annuities, and current new law has now even made them no longer viable.  There is a misconception out there that an irrevocable annuity will be exempt from Medicaid.

Like any other financial or estate planning tool, the annuity is a powerful planning option in the right circumstances and with the right plan design.  But like any powerful tool, care and skill should be exercised when implementing it.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at:, or by Telephone at 989-652-9923.

Andy Richards


About Issues For Advisors

About 3 years ago, I started publishing a Quarterly E-Newsletter targeted directly at professional colleagues and valued referral sources. The intent of the newsletter was to be a resource for professional advisors, including Accountants, Insurance Professionals, Financial Planners, Brokers, Bankers and Planned Giving professionals. The "Issues For Advisors," newsletters have 2 primary goals: (1) To provide timely, useful information about issues that are either of current significance, have caused a recent problem, or are of a recurring nature to our mutual clients, and (2) To keep the content brief (no more than a single page). It recently occurred to me that there is no "archive" where advisors can go to retrieve, or re-read prior Issues. Rather than "burying" them somewhere in the Smith Bovill website, I created an on-line Resource specifically dedicated to the Professional Advisors enumerated above. In addition to the "Issues For Advisors" Archive, Links to other resources (including, of course, the MICHIGAN ESTATE PLANNING BLOG and THE SMITH BOVILL LAW FIRM SITE), will be featured here.

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