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Who Gets The Money In My Deferred Annuity If I Die?

John L. Olsen

With regard to “who gets the money” in a deferred annuity, the answer is not quite as simple as many believe. The simple answer is “the beneficiary named in the policy” and that’s true much of the time – but not always.

Let’s start with some basics in annuity contracts:

Annuitant: Person (must be a human being) whose age and sex determine the amount of income payments.

Owner: Person or entity (in need not be a human being) who owns the rights in the annuity contract.

With regard to the required payout of a deferred annuity at death, all deferred annuity contracts issued since January 18, 1985 must pay out the contract value upon the death of the owner [IRC Sect. 72(s)]. Some contracts will also pay out upon the death of the annuitant (these are called “annuitant-driven” contracts). Of course, when the owner and annuitant are the same person, there’s no problem. But sometimes they’re not.  Many insurers will not issue a deferred annuity to an annuitant who is over a certain age (often, age 80). So when older consumers want to purchase a deferred annuity, they often name a younger relative to be the annuitant. When this is the case, and the annuity purchased is annuitant-driven, unforeseen – sometimes disastrous – consequences may result.

Example: Grandma Goodman, age 82, buys a deferred annuity that is “annuitant-driven. She is the owner and she names her daughter as the annuitant.  What happens if someone dies? The answer is: “It depends on who dies”. If Grandma dies first, the value of the annuity will pass to her beneficiary named in the contract.  What if the daughter dies first? The contract must be paid out (because it’s “annuitant-driven”) to the daughter’s beneficiary. Some contracts allow for naming a beneficiary of the owner and a beneficiary of the annuitant. One contract states that at the annuitant’s death, the contract value must be paid to the beneficiary named in the contract, but at the death of a “non-annuitant owner” (Grandma, in this case), the contract value passes to “the joint owner, if any, otherwise to the successor owner, if any, otherwise to the estate of the owner”.

Who would have expected that?

But it gets worse. In the above example, if Grandma named anyone other than herself or her daughter as beneficiary of that annuity and her daughter died first, very bad things will result. First, Grandma loses the money in the annuity. It passes to the granddaughter, as beneficiary of the deceased annuitant. Second, the granddaughter must pay income tax on the annuity value in excess of Grandma’s “basis” (basically, what she paid into the annuity, less any withdrawals she took). And finally, Grandma will be deemed to have made a taxable gift to the granddaughter of the entire annuity value.

These are just some of the consequences of naming as annuitant someone other than the owner of the annuity. That is not to say that there cannot be valid reasons for this arrangement, only that everyone involved (the agent, the annuity buyer, and the annuity buyer’s tax and legal advisors) only that everyone should know the consequences first, before the application for the annuity is completed.

In my next installment, I’ll discuss the problems that can arise from having a trust named as owner or beneficiary of a deferred annuity.

Click here for more articles from this author.

About the Author:

John L. Olsen, CLU, ChFC, AEP is an insurance agent and estate planner practicing in St. Louis County, Missouri. With over 40 years of experience in the financial services industry, he serves on the boards of the St. Louis Estate Planning Council and the St. Louis chapter of the Society of Financial Service Professionals and is a Past President of the St. Louis chapter of NAIFA.  If this article was helpful to you, be sure to check out the books listed on one of John’s websites: www.indexannuitybook.com.

In addition to serving his own clients, John provides case consulting services to attorneys, accountants, insurance agents, and financial advisors, and provides expert witness services in litigation involving annuities and investment products. Contact John at (314) 909-8818 or jolsen02@earthlink.net to receive personalized professional guidance in addressing your retirement needs.

 

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