Michael Kitces explains the complicated concept that is a non-qualified deferred annuity and some of its benefits and pitfalls. The annuity allows for tax deferred growth which is certainly a plus for those in high tax brackets and also avoids Required Minimum Distributions obligations during the owner’s lifetime. However, upon the annuity owner’s death, the beneficiary is required to begin post-death RMD which notably occurs upon death of the first owner with a jointly owned contract. This means that a surviving joint owner can even be forced to liquidate their assets, precipitating more tax. Kitces elaborates,

Fortunately, the tax law does allow for “spousal continuation” of an annuity payable to a surviving spouse. But that rule triggers based on whether the spouse is named as the beneficiary, not the joint owner. In fact, once a surviving spouse is properly named as a beneficiary, there’s often no reason at all for the annuity to be jointly owned anymore!

And between non-spouses, the situation can be even more problematic, as the death of one annuity owner can force the surviving owner to begin taking “stretch annuity” payments over his/her life expectancy, even if it was the survivor’s money in the first place and he/she doesn’t want it!

Which means in the end, most situations where an annuity is jointly owned, it probably shouldn’t be, as most of the benefits of joint ownership can be accomplished by other means when using an annuity anyway (unless specifically pursuing contractual living or death benefit guarantees that are designed to apply for both spouses jointly). And in situations where it’s not actually necessary to jointly own the contract anyway, by not owning the contract jointly, the risk of unintentionally forcing the contract to be liquidated at an undesirable time is greatly reduced!

Continue reading Michael Kitces’ full opinion here: The Problem With Joint Ownership Of Non-Qualified Deferred Annuities

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal