Placing a variable annuity in a living trust?

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Norton750
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Placing a variable annuity in a living trust?

Post by Norton750 » Wed Oct 30, 2019 4:09 pm

My mother just established a revocable living trust and is preparing to move her assets into it. One asset she owns is a non-qualified variable annuity in her name which she plans to leave to her heirs. I’m wondering about the pros and cons of:

A. Having the revocable trust become the owner of the variable annuity
-------------- vs. --------------
B. Leaving the annuity in my mother’s name and having it pass to her heirs via the beneficiary designation

Does anyone have any experience with this? Are there any tax implications to changing ownership of the variable annuity to a living trust?

Thanks for any help you can offer.

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FiveK
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Re: Placing a variable annuity in a living trust?

Post by FiveK » Wed Oct 30, 2019 9:46 pm

Variable annuities are usually poor choices for the original owner, and often worse for heirs.

Why worse for heirs? Because the VA doesn't get a basis "step up" the way taxable mutual funds and stocks do, and all the interest is taxed as ordinary income, not the lower rates for qualified dividends one gets in stocks and most mutual funds.

If her marginal rate is lower than her heirs, and she is past the surrender fee period in the VA, it may be worthwhile for her to withdraw the money from the VA (not necessarily all at once) and reinvest that money in some form of a Three-fund portfolio.

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Cyclesafe
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Re: Placing a variable annuity in a living trust?

Post by Cyclesafe » Wed Oct 30, 2019 10:02 pm

Norton750 wrote:
Wed Oct 30, 2019 4:09 pm
My mother just established a revocable living trust and is preparing to move her assets into it. One asset she owns is a non-qualified variable annuity in her name which she plans to leave to her heirs. I’m wondering about the pros and cons of:

A. Having the revocable trust become the owner of the variable annuity
-------------- vs. --------------
B. Leaving the annuity in my mother’s name and having it pass to her heirs via the beneficiary designation

Does anyone have any experience with this? Are there any tax implications to changing ownership of the variable annuity to a living trust?

Thanks for any help you can offer.
It makes little difference. But non-trust assets will likely have to pass through probate. My variable annuity is within my RLT.
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

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FiveK
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Re: Placing a variable annuity in a living trust?

Post by FiveK » Wed Oct 30, 2019 10:09 pm

Cyclesafe wrote:
Wed Oct 30, 2019 10:02 pm
...non-trust assets will likely have to pass through probate.
One can avoid probating most accounts (including annuities) by naming beneficiaries.

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Klewles
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Re: Placing a variable annuity in a living trust?

Post by Klewles » Thu Oct 31, 2019 2:57 am

Norton750 wrote:
Wed Oct 30, 2019 4:09 pm
I’m wondering about the pros and cons of:

A. Having the revocable trust become the owner of the variable annuity
-------------- vs. --------------
B. Leaving the annuity in my mother’s name and having it pass to her heirs via the beneficiary designation
For avoiding probate, not many pros/cons of A versus B. But typically a living trust includes language covering events other than death, such as if mother becomes incapacitated. You get that coverage with A, but not with B.

Alan S.
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Re: Placing a variable annuity in a living trust?

Post by Alan S. » Thu Oct 31, 2019 11:06 pm

Be aware that when a trust owns an annuity, if a "non natural person" eg a charity becomes the remainder or other beneficiary, the annuity will lose it's tax deferred status. Therefore, she should be careful when changing the beneficiaries of the trust.

See attached article by Michael Kitces: https://www.kitces.com/blog/trust-owner ... annuities/

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Cyclesafe
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Re: Placing a variable annuity in a living trust?

Post by Cyclesafe » Fri Nov 01, 2019 7:52 am

Alan S. wrote:
Thu Oct 31, 2019 11:06 pm
Be aware that when a trust owns an annuity, if a "non natural person" eg a charity becomes the remainder or other beneficiary, the annuity will lose it's tax deferred status. Therefore, she should be careful when changing the beneficiaries of the trust.

See attached article by Michael Kitces: https://www.kitces.com/blog/trust-owner ... annuities/
Thank you for your post. Didn't know this.
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

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Norton750
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Re: Placing a variable annuity in a living trust?

Post by Norton750 » Sat Nov 02, 2019 11:48 am

Alan S. wrote:
Thu Oct 31, 2019 11:06 pm
Be aware that when a trust owns an annuity, if a "non natural person" eg a charity becomes the remainder or other beneficiary, the annuity will lose it's tax deferred status. Therefore, she should be careful when changing the beneficiaries of the trust.

See attached article by Michael Kitces: https://www.kitces.com/blog/trust-owner ... annuities/
Alan S.,
OP here - many thanks, this is precisely the info I was looking for.

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