Trusts are an integral part of estate planning and funding a trust so that it meets the needs of a client’s estate and wealth transfer goals involves a proper and sound strategy.
Nearly any type of asset can be used to fund a trust, including stocks, bonds, cash, mutual funds, real estate property, life insurance and annuities. While life insurance is an option for funding a credit shelter trust when the surviving spouse is insurable; what option can you consider when they aren’t?
Annuities in a credit shelter trust
A credit shelter trust (also known as a bypass trust, or A/B trust) is an irrevocable trust commonly used in estate planning. Annuities can provide a very effective way to manage credit shelter trust assets and pass them on to the trust beneficiaries. Trusts are able to own annuities and receive tax deferral on any gains as long as the trust is acting as an agent of a natural person. Therefore, all trust beneficiaries need to be actual living people.
What it could look like
In an example where the trust purchases an annuity for each of trust beneficiary, the trust would be the owner, and the trust beneficiary would be the annuitant. Living or death benefits may also be selected in most cases. Generally speaking, the trust could distribute these annuities “in kind” to each beneficiary upon the triggering event stated in the trust, usually the surviving spouse’s death. At this point, each beneficiary would become the owner of the annuity that they are the annuitant on. Although it is based on a series of Private Letter Rulings (PLR’s), the IRS has allowed beneficiaries in such cases to take over ownership of these annuities and not be taxed on them until money is withdrawn. If the beneficiary is under 59 ½, the issue of premature withdrawal penalty could apply. Withdrawals would be taxable to the extent of gains exceeding basis. This could also provide for “stretch” or “extended” benefits to heirs of the trust beneficiaries.
The benefits of using annuities in trusts and what kinds of trusts can be used
These are some widely known benefits of using an annuity to fund a trust –
- Tax deferral
- Market participation with death benefit protection
- Income and taxation control
- Asset allocation potential within one product
- Guaranteed income with a living benefit. (Please note that guarantees are subject to the claims paying ability of the issuer.)
The following are some common trust names in which annuities may be used –
- Credit Shelter Trust
- Marital Trust (also called A Trust or Surviving Spouse Trust)
- Irrevocable Family Trust
- Special Needs Trust
- Generation Skipping Trust (GST)
- Charitable Remainder Trust (CRT)
- Revocable Living Trust
- Charitable Lead Trust (CLT)
- Qualified Terminal Interest in Property Trust (QTIP)
- Irrevocable Life Insurance Trust (ILIT)
- Grantor Retained Annuity Trust (GRAT)
- Secular Trust
- Rabbi Trust
- Dynasty Trust
- Qualified Domestic Trust (QDOT)
Popular annuity in trust planning strategies
Because of the benefits that using an annuity in trusts provides, there are some well-practiced strategies a financial professional can consider for their clients.
- Death benefit protection on a surviving spouse’s life, tax deferral, income suppression and/or investment management simplification in a credit shelter trusts
- Distribution in-kind to trust remainder beneficiaries and tax deferral in various types of irrevocable trusts
- Income suppression and death benefit protection in Net-Income Charitable Remainder Unitrusts (NIMCRUT)
- Tax deferral and death benefit protection on the special needs individual in a special needs trust
Takeaway and learn more
Annuities can be a helpful tool that a trustee uses to manage multiple risks in an estate plan through its multiple product features. Money sitting in a credit shelter trust, or a different type, can be creatively used and can provide additional benefits to trust beneficiaries through the use of annuities.
For more information on the strategies mentioned, reach out to Nationwide Retirement Institute’s Advanced Consulting Group at firstname.lastname@example.org.
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