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Duration of Ownership
Under many (but not all) annuities, the owner’s rights in the contract cease when the annuitant dies, and one of two things happens: either the value of the annuity is paid to the beneficiary or the beneficiary becomes the new owner, if the spousal continuation rule applies. This doesn’t present a problem where the owner and the annuitant are the same person. But care must be taken in those situations where the owner and the annuitant are different parties.

Let’s say that under John’s deferred annuity, the maximum age to which the annuity starting date may be deferred is 75. However, John is age 80, and he wants to obtain income via a systematic withdrawal rather than an income option. In order to maintain the annuity in its deferral period, John names his son Cory, age 40, as the annuitant, though he retains ownership of the contract so that he can affect a systematic withdrawal from it. If John’s rights would cease in the event of Cory’s death, however, John will lose control of his funds in the event that Cory predeceases him.

To avoid that risk, John could also name himself beneficiary under the contract. Under such an arrangement, John would incur income taxes on the earnings if the annuity value were paid to him in the event of Cory’s death, but at least those funds wouldn’t be paid to a different party. Cory could be named a contingent beneficiary to receive the proceeds in the event of John’s death. The accompanying illustration depicts this suggested structure for John’s annuity.

Under other contracts, the owner’s rights do not automatically cease when the annuitant dies. If the owner is not the annuitant and the annuitant dies first, some contracts provide that the owner automatically becomes the annuitant. Other contracts provide for a period of time in which the owner can name a new annuitant, after which, if a new annuitant is not named, the owner becomes the new annuitant.

Printed with permission of Advanced Underwriting Consultants

Last Updated: 9/23/2012 10:05:00 PM