These rules are designed to prevent the use of joint ownership to obtain tax deferral on annuity earnings over more than one lifetime, except in the case of married couples. For example, let’s say that Ed purchases a deferred annuity with $100,000 at age 65 and names his daughter Tamara, age 40, as joint owner. Ed doesn’t need income, so he lets earnings accumulate in the annuity on a tax-deferred basis until his death at age 75. At that point, if the annuity had credited 8% each year, the annuity would contain $115,892 of as-yet-untaxed earnings, when Tamara could continue to accumulate and defer taxation of those annuity earnings for the remainder of her life, or even longer if she named another joint owner.
The required distribution rules apply to contracts issued after January 18, 1985. For contracts issued today, there are only a few situations that might call for joint ownership of an annuity. In the case of married couples, the effect of joint ownership for purposes of successor ownership is best obtained by having one spouse be the owner and the other spouse be the beneficiary. In the event of the owner’s death, the spouse can succeed to ownership by application of the spousal exception to the required distribution rule.
If joint ownership by a married couple is desirable for other reasons, be sure that each spouse names the other as primary beneficiary – for the spousal exception to the required distribution rules to apply, the surviving spouse must be the designated beneficiary of the contract. If someone other than the surviving spouse is the designated beneficiary, or even if the spouse is the beneficiary along with another person, then even if the surviving spouse is a joint owner, the spousal exception is lost.
Other Joint Ownership Considerations
Consumers may say they desire joint ownership because they are under the misconception that joint ownership of an annuity is like a joint bank account. It is not.
With a joint bank account, either of the persons named on the account can make a withdrawal from the account independent of the other. However, with join ownership of an annuity, the signatures of both owners are required to exercise the rights of ownership.
Further, if a withdrawal is taken, both joint owners generally receive a 1099 form, each for one-half the amount of the withdrawal. This means that each joint owner assumes the tax liability for one-half of every withdrawal, even if the entire withdrawal was spent by only one of the owners. Any joint owner under age 591/2 would also be liable for the 10% penalty tax on any taxable amount of his or her portion of the withdrawal, unless an exception applied.
The desirability of joint ownership in light of these complexities should be carefully reviewed before naming more than one owner to an annuity.
Joint ownership of IRAs is prohibited by the law governing IRAs.
Printed with permission of Advanced Underwriting Consultants
Last Updated: 12/15/2002 11:11:00 AM