Annuity Planning Tax Traps

St Louis FPA meeting

This week I attended the St Louis Chapter of the Financial Planning Association meeting at which John Olsen, CLU, ChFC, AEP gave two presentations Tax Traps in Annuity Planning and Index Annuities: Looking Under the Hood.  John serves as an expert witness in the area of annuity contracts, and is an author of books and articles.  He co-authored a book, with Michel Kitces, MSFS, CFP©, CLU, CHFC, to which I often refer; The Annuity Advisor.  It has been a helpful resource because many new clients come to me with existing annuities, and every annuity contract is different.

Annuity ownership

One of the biggest take-aways that I gleaned from the session was to pay careful attention to the titling of the annuity, who owns it, who is the annuitant, and who is the beneficiary, not only to make sure that client’s wishes will be followed upon their passing, but because of the potential tax ramifications.  John shared many examples of instances where client wishes were not met, and some that had negative tax consequences.  Especially important is who’s death triggers the benefit, and to check with the issuing insurance company to see how they handle a situation when the owner and annuitant are different.  He gave examples of how different insurance companies handle the same situation in different ways.

If the owner and annuitant are the same, generally things are more straight forward, if they are different, you want to check with your insurance company to see how they handle the death of either and make sure that it follows you wishes.

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