Questions that Annuity Sellers Can’t Answer

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Questions that Annuity Sellers Cant Answer
Questions
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Special Notice

• Not legal advice
• If you encounter annuities issued prior to 1986,
  rules may all be different
• Applies to non-qualified annuities

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What are Valid Conditions for 1035 Exchange

• Owner, annuity, beneficiary same, maturity date
  same, but lots of flexibility as to type
• many to one
• one to many
• Partial
• Main issue will insurance company allow
• Life to annuity ? over looked tax benefit
• (even works with term policy)

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1035 Life to Annuity Tax Advantage
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Who Should be the beneficiary of an annuity

• Spouse is absolute best choice (make children
  contingent)
• If no spouse, then consider what happens if
  contract is annuitant driven (AD) vs. Owner
  Driven (OD)
• NOT a trust, no look through provisions as with
  IRA beneficiaries

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Who Should be the Owner and Annuitant of an
Annuity?

• Do everything possible to make them the same
  person
• When age is a limitation of sale or commission,
  think through ramifications if
• Owners dies first
• Annuitant dies first
• Know if contract is annuitant driven
• Non Natural persons okay as owners if agent

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Whats the 59 ½ penalty rule?

• 10 penalty on taxable amounts
• Except
• Payments received because of death of the holder
  (or primary annuitant if holder is non-natural
  person)
• Substantially equal lifetime payments (just like
  IRAs)
• Immediate annuities

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Important Definitions
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What are Problems When Owner and Annuitant not
the Same

• One case study under 4 conditions
• Annuitant driven annuity
• Owners dies first
• Annuitant dies first
• Owner Driven annuity
• Owner dies first
• Annuitant dies first

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Case

• Case
• Bob age 70 owner
• Mary (wife) age 55 Annuitant
• Children are beneficiary

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OD and Owner Dies

• Annuity terminates and children must distribute
  within 5 years or elect annuitization (within 60
  days)
• Better structure would have been
• Mary (wife of owner) as beneficiary
• Kids as contingent beneficiary
• Result Mary could have continued Annuity

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OD and Annuitant Dies

• Bob may become new annuitant if contract so
  specifies or
• Bob selects a new annuitant (potential tax trap)
• Good idea to name contingent annuitant in
  original contract

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AD and Owner Dies

• Since all contracts are OD, the annuity
  terminates, beneficiaries have 60 days to elect
  annuitization or 5 year payout (beneficiaries
  exempt from 10 penalty upon death of holder)
• Spousal continuance only applies if spouse is
  named as SOLE beneficiary and contract allows for
  spousal continuance (sometimes if spouse is
  partial beneficiary)

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AD and Annuitant Dies

• Annuity pays out to children they decide in 60
  days on payout options
• Owners is deemed to have given a gift to children
  (estate consequence if more than 11,000)
• Beneficiaries pay tax and also 10 penalty if
  under 59 ½ (because on death of annuitant,
  beneficiary becomes the taxpayer)

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Proper Structure Avoids

• Untimely taxation
• Unwanted gift taxes
• The 10 percent IRS penalty
• Loss of spousal continuation

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Possible solution to bad structure

• 1035 to another contract that is OD, same owner,
  annuitant, beneficiary
• Then, owner changes the annuitant

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What is the tax impact of a change in owner?

• Taxable event to owner
• Exceptions
• Transfer between spouses
• Transfer incident to divorce
• Transfer to grantor trust (living trust)

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How is loss treated if annuity surrenders for
loss or sold for profit?

• Ordinary loss (excluding surrender charge)
• the IRS says that a loss under a variable annuity
  is treated as a miscellaneous itemized deduction
  subject to the 2 floor (others differ)
• Ordinary gain

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Annuity gain is Income in Respect of Decedent

• Beneficiary gets a deduction for estate taxes
  paid by decedent as beneficiary receives payments
• Example 100,000 annuity subject to estate
  taxes 45
• Each portion of payment subject to income tax
  received by beneficiary, may take deduction of
  45

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Protection

• Creditor protection and bankruptcy protection are
  State specific
• States have guarantee funds that protect
  annuities but read that law before discussing
• Note that recent changes in creditor and
  bankruptcy protection for IRAs does NOT affect
  non-qualified annuities

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What other agents do wrong

• Sell the hottest annuity and they dont know the
  contract provisions. Smart agents work with 2-4
  annuities and know the contract inside out
• Because these agents sell the product du jour
  and are product-centered, they never get
  referrals from other professionals

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How to capitalize

• Study these resources (next page) and know more
  than other agents
• Send the Annuity Newsletter to CPAs and Eldercare
  attorneys each month

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Resources

• Dick Duff column in SMA
• RWDuffCLU_at_aol.com
• Tax Facts www.nuco.com
• Tax Facts News monthly IRS updates
• Contract Review Service
• http//www.contractstructure.com/Contract_Reviews.
  aspx
• Advanced UW dept of insurance company

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To Meet Existing Annuity Owners

• Annuity Direct Marketing System
• Attracts existing annuity owners
• User feedback
• 20 off code ANN1213

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To Meet Existing Annuity Owners

• "I just wanted to let you know that I'm having
  fantastic results with the system. Yesterday I
  mailed the postcard provided in the materials to
  4,000 annuity owners in my geographic area. In
  the three hours, since the first call, I've
  received 15 calls. Michael W., Atlanta, GA
• "I received 38 calls on the first 5 days after I
  ran an ad for 89 in a monthly senior
  publication. The results from the first two ads
  have netted 11 sales ranging from 38,000 -
  279,000. I would recommend this system to anyone
  who is in the senior market. Carl W., Omaha, NE
  
• "I have never written a testimonial for anyone. I
  do believe that your "Annuity Owner Mistakes"
  program should be the first. I bought the program
  in March of 2003 and began to market it per your
  instructions in April 2003. Year to date, or I
  should say from April 2003 through today October
  9, 2003 I have written 1,200,000 in Annuity
  Premium and 30,000 (oh, by the way) Life
  Premium. Please feel free to use me as a referral
  anytime. Carl P., Madison, NC

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Questions
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