Time of Year for Annuity Plans?

Thinking about annuity plans? An extended nonqualified annuity strategy can provide an extension of tax deferral and allow for a more tax-efficient transfer of assets to multiple generations. The strategy should be discussed with those contract owners who plan to pass their annuity to heirs.

Additionally, there are creative features that can be utilized to help ensure the client's goals are met, such as restricted beneficiary options and successor beneficiary designations.

Upon death of the annuity owner, the Internal Revenue Code requires a distribution. How distributions are made depends on whether the death of the contract owner occurred before or after the annuity starting date (i.e., annuitization date). If the contract owner dies before the annuity starting date, the entire contract value must be either:

· distributed within five years of the date of the owner's death;

· distributed over the beneficiary's life expectancy or a period not extending beyond the beneficiary's life expectancy;

· annuitized based upon the beneficiary's life expectancy or a period not extending beyond his or her life expectancy.

For both of the first two options, payments must begin no later than one year following the owner's death.

An exception allows for an additional option available only to a surviving spouse. The spousal exception states that upon death of the contract owner, or the surviving spouse becomes the contract owner, he or she may elect to continue the contract. There are no tax consequences if the spouse elects to continue.

If death of the contract owner occurs after the annuity starting date, any remaining payments must be made at least as rapidly as prior to the death of the contract owner. In other words, the payments (if any are remaining) may continue on the same schedule, a shorter (faster) schedule or as a lump sum.

Because the code forces a distribution upon death of contract owner, it's important to remember distributions must begin within the appropriate deadline unless the spousal exception is applicable. It may be necessary for you to assist the beneficiaries after death of the contract owner in making a distribution election.

For those contract owners who desire control over the ultimate disposition of assets, a restricted beneficiary option should be discussed. The restricted beneficiary option provides your client with the ability to determine how the variable annuity assets will be distributed at death, and may help you to retain the assets and clients for future generations.

An example of a restricted beneficiary option established by a contract owner may include a partial restriction, whereby a portion of the death benefit amount is paid in a lump sum to the beneficiary while the remainder is restricted and paid over the beneficiary's lifetime. The restriction permits the contract owner to designate how the death benefit proceeds are distributed.

When multiple beneficiaries are named, the owner can elect a restriction for each beneficiary, thereby customizing the restriction for each. The restriction provides the owner control and peace of mind, while helping to ensure the death proceeds are distributed per their wishes.

It's important to note that a spousal beneficiary has the right to reregister the contract regardless of the beneficiary designation restriction elected. Additionally, federal tax laws are complex and subject to change. Neither the company nor its agents or representatives give tax or legal advice.

Craig Langweiler is president of the Langweiler Financial Group, in Newtown. He can be reached at 215-860-8066 or at: [email protected] americanportfolios. zcom.



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