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Annuities in Trusts Bad Faith or Loophole?

Discussion in 'Life Insurance, Annuities & Other' started by lmiklosy, Dec 7, 2015.

  1. lmiklosy

    lmiklosy Law Topic Starter New Member

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    Jurisdiction:
    California
    The US tax code is specific about tax treatment
    of annuities that fund a Grantor Trust or more familiar a family
    trust. When the grantor dies the IRS will consider this a taxable
    event depending on who the specified beneficiary is. If the annuity
    beneficiary is a spouse, she has the option of continuing the annuity
    till maturity or to begin the annuity pay-out phase. If the
    beneficiary is a trust, then the distribution is mandatory over a
    5-year pay-out period. The tax code is clear describing the taxable
    event, see Par. 26 US Tax Code Section 72(u,s).



    The tax code handles the taxable event in two
    parts to prevent non-persons like corporations and charities from
    investing in tax-deferred investments where the annuitant never dies,
    for that would mean the investment can be deferred from tax
    indefinitely.



    When annuities are drawn the annuity contract
    may specify the continuation option for the annuitants. Either the
    pay-out phase begins when the beneficiary receives the pay-out
    (lumped sum or distributed), or the spouse may continue the annuity
    contract till the annuity maturity date. Annuities where husband and
    wife are joint-annuitants are common.



    The trouble begins when an annuity is used to
    fund a subsequent family trust, the spouse is no longer the
    beneficiary, the trust is. Insurance companies view the trust as a
    non-person, thus the pay-out phase begins when husband dies
    regardless of the annuitant's intent or the accumulation period
    elapsed after death. If you hold an annuity in a family trust, you
    might disagree with the position of insurance companies.



    If an annuity was drawn with husband and wife as
    joint-annuitants as persons, and subsequently the annuity is used to
    fund a family trust, the wife is entitled her two continuation
    options once the husband dies. The spouse is entitled the
    continuation since 1) The annuity preceded the trust 2) The trust is
    not a charity or corporation 3) The INTENTION of an annuity drawn for
    joint-annuitants husband and wife was clearly for the benefit of the
    surviving spouse.


    Does anyone have experience with contract law
    for annuities, better yet can anyone show case law to show the intent
    of joint annuities is for the surviving spouse? For insurance
    companies who substitute the annuity death benefit instead of
    maturity value, is this bad-faith insurance? Is funding a trust with
    an annuity a scam by insurance companies to hold annuitants capital
    by attrition? What about non-disclosure in the practice of funding
    trusts with annuities?
     
  2. army judge

    army judge Super Moderator

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    This is far too complicated for you to receive the PROPER assistance on an internet forum.
     
  3. adjusterjack

    adjusterjack Super Moderator

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    I'm amused at your emphasis on the word INTENTION. If it was the intention of the annuitants that the annuity was for the benefit of the surviving spouse and it didn't work out that way because they also had a trust then that's not the insurance company's fault.

    It's the fault of the annuitants who screwed things up at the getgo because they failed to educate themselves about what they were getting into.

    So, no, it's not bad faith and it's not scam. It's just the usual ignorant people doing something foolish and the trying to pass the blame on to somebody else.
     

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