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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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Hi... Im not sure if this is up your alley or meant more for

Resolved Question:

Hi... I'm not sure if this is up your alley or meant more for a financial advisor, but I'll pose it anyway. I am the trustee of my father's trust. He passed away 18 months ago. I am looking to invest some of the cash assets and was wondering what, if any, consequences there are if I put it into a deferred annuity. The trust would be the owner and I would be the annuitant, but I am not sure who is considered the beneficiary. Can the trust be the beneficiary? How would the taxation work on something like this. I assume nothing would be due until I start moving money out of the annuity, but I really don't know. I would like to know the pro/cons of investing in this manner. Any words of advice are welcomed.
Thank you,
Julie
Submitted: 2 years ago.
Category: Tax
Expert:  R. Klein, EA replied 2 years ago.

Randalltax :

If you had money in a trust and you are the sole beneficiary and the trust receives the cash from the annuity when you pass away, then you have a bit of a circle there.

Randalltax :

The trst would end up with the cash, but without a named bneficiary of the trust, the trust would have to be passed to your next of kin, regardless of your wants.

Randalltax :

In addition, the taxation on a trust is much higher than on an individual.

Randalltax :

If the trust was set up by your father for your father, then the trust typically has instructions for how to handle the assets when he passes. Of course, the trust can continue on after his death, which is part of the idea in the first place.

Randalltax :

Certainly you could choose to have the trust be the beneficiary of the annuity. That would keep the money in the trust and away from prying fingers if that is what you so desired. But relative to a live person getting the funds, the trust has a higher tax rate.

Customer:

I am the sole beneficiary as my mother is also deceased. If I had the trust as the beneficiary, would that mean that should something happen to me, my son would reap the benefits of the annuity? Could the annuity name have new annuitant should I die or would the annuity need to be liquidated according to the payout options? I like the idea of the trust being the beneficiary because of the protection it offers. Just don't want to shoot myself in the foot tax-wise by doing it that way. If I take the income out of the trust, that would cut the taxes down, right? (

Customer:

BTW... my son would be next in line to me in terms of beneficiary but my husband is successor trustee. You may have figured out, I am an only child and I have only 1 surviving child. I am trying to protect as much of my father's estate for him at a later time, which is why I thought about this as a good investment option. Thanks for your thoughts.

Randalltax :

First, if you are the sole beneficiary, you need to set up either a contingent beneficiary or other plan, otherwise if the bus hits you tomorrow, the trust will be thrown into the probate system to determine what to do with it.

Randalltax :

Second, if you have any life insurance product that pays the trust (an annuity is effectively a modified life insurance contract), remember that the trust will pay taxes on all undistributed income. This is true in your lifetime, as well.

Randalltax :

Depending on how the trust is set up, you may be able to pass the benefits to your son, or you may need to set up a new trust for his benefit. I would highly recommend consulting win an esteplanning attorney. We cannot give advice online in this area, in addition, the trust document is so complex, it cannot be fully comprehended with an online consultation anyway.

Randalltax :

The more important question is "is the annuity the best investment vehicle"? As a former licensed financial advisor, you generally only want an annuity if you want A) guaranteed income for a specific period of time and B) Need the guarantee and are willing to pay for it and/or C) need some sort of deferred tax benefit. An annuity is not cheap. Its designed as a financial product for those that are fearful that they will invest unwisely or lose money. Most annuities have some sort of guaranteed return. However, with even a modest investment portfolio and a trusted financial advisor (or two), you can expect better returns without a whole lot of risk. Talk with a neutral investment advisor (one that sells annuities and traditional investments), not just an annuity salesman who has a one-sided pitch.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2924
Experience: Over 20 Years experience
R. Klein, EA and 2 other Tax Specialists are ready to help you

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R. Klein, EA
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