There are two types of annuities: commercial or private. A commercial annuity is a contract entered into with an insurance or annuity company that sells financial products. The annuity contract of a commercial annuity provides that the company will be obligated to make payments to the beneficiary for a specified period of time. The time period may begin immediately or it may not begin until some future time. Additionally, some commercial annuities will provide benefits after the death of the owner. Thus, when funding a commercial annuity, both the lifetime beneficiaries and the after death beneficiaries require funding.

A Private Annuity is also a contract to make payments for a specified period of time; however, it is entered into between individuals and the payment obligations cease at the death of the recipient. Because payments only occur during the lifetime of the recipient, the private annuity does not have any death benefits that need to be funded. Accordingly, when funding a private annuity, only lifetime benefits can be funded. The private annuity lifetime payments are funded by utilization of a legal “assignment.”

If you are not certain of your annuity type or you need assistance is obtaining a legal assignment, consult your estate planning attorney.

Due to restrictions contained in the Internal Revenue Code, changing ownership of an annuity into the name of a revocable living trust is generally not recommended. Internal Revenue Code § 72(u) requires that all annuities be held by a natural person. Although this would appear to be an effective limitation on funding, many companies (and many legal commentaries) suggest that a revocable living trust meets the requirement of a “natural person” set forth in the Code. A recent IRS Private Letter Ruling would support the argument that a trust would qualify. However, IRS Private Letter Rulings are only binding upon the tax payer that requested the ruling. Thus, it may be better to err on the side of caution. Because of the uncertainty in the IRS code, you should seek legal counsel from your estate planning attorney.

Changing the owner of the annuity to the trust may also impact what distribution options are available under the annuity contract. Some annuity contracts provide that only a spouse or child of the annuity owner may select between different distribution options. Accordingly, if a trust is named as the beneficiary, the trust may only be able to select from a limited number of distribution options.

The most conservative funding option available is to change the beneficiary designation to name the living trust as the primary beneficiary without changing the ownership of the Annuity. You can change the beneficiary of your annuity to your trust using the form available here.

If the annuity is non-qualified, you can also change the ownership using the form available here.  You should consult with your insurance agent, or counsel, because some annuity riders and additional benefits may be lost if you prosecute a change in ownership.

Many institutions may request verification that the trust is actually in existence. Generally, including a copy of an Affidavit of Trust or the pages of the trust reflecting the name and current trustees and the signatures will satisfy most institutions.

Additional Considerations

From time to time, clients borrow money from financial institutions. The loan may take many forms including an educational loan or line of credit. Frequently, financial institutions require a borrower to name the financial institution as the beneficiary of the annuity as collateral for the loan. Under these circumstances, changing the beneficiary designation may result in acceleration of the loan repayment. Because of the potential consequences of these complexities, you should consult your estate planning attorney.

Lenders may release their interest in the annuity depending on how much of the loan has been repaid. Other lenders may require the old loan to be replaced with a new loan naming the living trust as the borrower. What action the lender takes will often depend on whether there has been a change in interest rates. Regardless of what option the lender accepts, it will most likely insist on reviewing an entire copy of the trust agreement to ascertain whether there are any restrictions in the trust document which prevent encumbering the trust property.