Mistakes in Titling Annuities Could Have Undesirable Results

30 Oct

There’s more to retirement than managing assets; you must also ensure that those assets are titled correctly. Not doing so, particularly in regard to annuities, can have major implications for you and your loved ones.

Let’s say you decide to invest move some of your assets from a mutual fund to an annuity because you want your beneficiaries—your children—to receive the annuity death benefit. The chart below illustrates.

Sample titling of an Annuity vs. Mutual fund:

 

Mutual fund

Title of account

Joint owners: John and Jane Doe, joint tenants with right of survivorship (JTWROS)

Event

John Doe’s death

Asset distribution

Jane Doe, as joint tenant, controls the assets in the mutual fund

 

Annuity

Title of account

Joint owners: John and Jane Doe

Annuitant: John Doe

Beneficiaries: Sam and Sarah Doe

Event

John Doe’s death

Asset distribution

As beneficiaries, Sam and Sarah Doe receive the annuity death benefit

This seems simple enough but not so fast. Mis-titling the annuity could potentially result in an unexpected payout with undesirable tax consequences. Here’s how. Again, John and Jane Doe are the owners of the annuity. If John Doe dies, the annuity would in all likelihood pay out to the beneficiaries, the children, even though Jane Doe is alive. That’s because death of an owner generally triggers a payout to the beneficiaries.

If you’re in a second marriage, you may face a conundrum: You want to share ownership of property with your new spouse, but you also want your children from your first marriage to inherit your share of the property when you die. What to do? You and your spouse could be joint owners of the account, with the beneficiaries listed as your children. As beneficiaries, then, your children would receive the annuity benefit upon your death.

Although the husband and wife have been listed as joint owners, you don’t want to list them as joint annuitants or else the children will receive nothing until the death of the second annuitant.  The issue of titling your assets, an estate planningissue, is not just for the rich but for anyone that owns anything of value.

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