Retirement Daily Learning Center: Critical Conversations with Your Family: Six Steps to Ensure Success

Retirement Daily Learning Center: Critical Conversations with Your Family: Six Steps to Ensure Success

Ask Bob: Who Can Be Named as Beneficiary on a Trust-owned Annuity?

A reader gets conflicting information from their annuity company and wonders why the rules changed. Our expert explains.
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Question

My mother is the beneficiary of a marital deduction trust which was created when my father passed away (almost 30 years ago). Mom was the original trustee but stepped down from that position and I became the trustee in 2020, in accordance with the terms of the trust.

In 2012, the trust purchased a deferred indexed annuity. The trust is the owner, Mom is the annuitant, and my 3 siblings and I were named as the beneficiaries. The contract was issued with those specifics.

One of my siblings passed away recently and, as trustee, I contacted the insurance company to update the beneficiary designation to now show myself, two siblings, and a niece as the beneficiary, per my mom's wishes and the trust's terms. The annuity issuer responded and stated that the trust had to be the beneficiary. Is this true? Seems wrong, since the original contract was issued with the individuals named as the beneficiaries.

Also, the beneficiary change form asks for the beneficiary's relationship to the "owner." Since the owner is a trust, how would I fill in this box - whether it's naming the trust as beneficiary or if I'm able to name individuals?

Answer

This is complicated, says Harry Margolis, author of Get Your Ducks in a Row: The Baby Boomers Guide to Estate Planning – 2020 Edition. “First, it’s unusual for a trust to own an annuity, but it sounds like it works since your mother, not the trust, is the annuitant,” notes Margolis. “In terms of naming your niece as beneficiary rather than the trust, that sounds appropriate to me since they allowed the naming of individuals in the first place,” he says. “However, it really shouldn’t matter since I assume the trust contains the same provisions regarding distribution of the annuity proceeds upon your mother’s death.”

“I’m not sure what the options are in terms of the ‘relationship’ of the beneficiaries to the owner,” says Margolis. If you can name the individuals, you can say they are “beneficiaries,” which is accurate, or children and grandchild, which is not quite accurate but might work better.

The bottom line is that an annuity is a contract with an insurance company. “So they’re in control. Ultimately, you’ll have to do what they say even if they’re not consistent or it doesn’t really make sense,” Margolis says.

Got questions? Get answers!

Email Robert.Powell@maven.io.


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Question

My mother is the beneficiary of a marital deduction trust which was created when my father passed away (almost 30 years ago). Mom was the original trustee but stepped down from that position and I became the trustee in 2020, in accordance with the terms of the trust.

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