Annuity and Life Insurance reminds you of making sure that you understand the contract language of your annuity. If you have any questions about this issue, contact the broker or life insurance agent that assisted you with your annuity for more information.
Contract language can lead to unintended inheritance consequences
PalmBeachDailyNews.com, By Gail Liberman, Special to the Daily News
Well, now that you, hopefully, just concluded a romantic Valentine’s Day, how surprised would you be if the love of your life disinherited you?
Yet it happens — too often, inadvertently.
Here’s an example of how, suggests Kevin Loffredi, co-founder of Advance Sales Corp., the Oakbrook Terrace, Ill., publisher of Annuity Intelligence Brief.
Your spouse is listed with you as an owner of your variable annuity contract, while the children are listed as beneficiaries. When the first spouse dies, the money goes to the beneficiary children instead of paying out to the surviving spouse, as was intended.
To avert this issue, the contract should have been titled with a "joint-and-survivor" option. The children would be "secondary beneficiaries," he says.
Loffredi has claimed that a whopping 38 percent of variable annuities are improperly titled.
One of four contract owners could experience serious problems, according to his recent report. And one of 10 contracts could wind up in arbitration court because of inheritance or tax disputes.
Variable annuities, which are contracts with life-insurance companies that let you invest in a selection of investments, often mutual funds, are particularly complex.
But I’ve heard of titling problems that span a lot of other types of assets as well.
Today’s headlines may deal with Bernie Madoff and the impact of our lousy economy. Titling errors, though, can create even worse financial news.
It all sounds like a no-brainer. Of course, you own your assets. You probably want your spouse to inherit your assets when you die. Or, perhaps, you want your kids to have them. Therefore, they’re beneficiaries, right?
However, beware as your finances become complex.
Loffredi says in some cases, the annuity contract lists the children as the beneficiaries, but the annuity holder’s trust states that the proceeds should go charity.
Lack of financial planning can add tax problems to the equation. Before an annuity can be transferred to a trust, for example, the title must be changed. Nevertheless, once you transfer ownership, federal taxes often are owed.
Have you already put your annuity into a living trust and designated the trust as beneficiary? If this happens, the proceeds are paid to the trust when you die. The trust then determines who gets the money. Meanwhile, if a surviving widow is entitled to any of the proceeds, she’ll likely have to pay taxes on them. This situation might be avoided by naming one or both spouses as owner(s) and the surviving spouse as primary beneficiary, with the trust as the "contingent" beneficiary.
Through this arrangement, variable annuity investments could continue to grow tax-deferred for the remaining spouse, Loffredi says.
Does your annuity have an enhanced death-benefit guarantee, in which the beneficiary gets the principal or stepped-up market value, whichever is greater, when you die?
In that case, if both spouses are listed as contract owners, there could be problems.
When one spouse dies, the surviving spouse, depending on the insurance contract, may be cheated out of the annuity’s enhanced death benefit value.
If you have a variable annuity, consider running some of these potential issues by an estate planning attorney who has an extensive background in taxes and insurance.
It can pay to head these problems off at the pass.
Gail Liberman is co-author of several books with her husband, Alan Lavine. Their latest, published by Que, is "Quick Steps to Financial Stability."
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