Not All Annuities Are Alike, and Not All Annuities Work Well in a Charitable Trust
Why the concern with choice of annuity? After all, the trust document is the critical element to making the annuity work as an income deferral investment.
It is important to realize that there are important product features that make some annuities superior to others in terms of flexibility, performance and value. These critical product design features (discussed at length in "The Ideal Annuity") include:
- The amount of withdrawal that can be taken at any point without penalty
- Issue age
- Annuitization age
- Expense ratios
- The number and timing of penalty free withdrawals per year.
The above product features are by no means the only considerations in choosing a suitable annuity product for use in a Net Income with Make up Charitable Remainder Unitrust (NIMCRUT). Of equal importance is the company offering the annuity-particularly with respect to the company's familiarity with administration procedures and relationship with the administrator.
Effective communication is crucial between the insurance company and the administration firm. They must create a cooperative partnership, and the administration company must be knowledgeable in the technical complexities of charitable trusts to assure that proper administration procedures continue. Renaissance Administration LLC, a wholly owned subsidiary of Renaissance, is a leader in the administration industry and is proficient at developing positive, working relationships with insurance companies.
There are many issues involved in selecting an insurance company to be behind an annuity and the administration firm.
- Identify a key contact at the insurance company that can provide reliable answers to questions regarding the annuity you have purchased to use in a charitable remainder trust.
- Make certain that your administrator can answer the following simple questions: "Where should the application be sent? How will the insurance company know that the annuity is being used inside a CRT? What is an annuity?"
- Make the insurance company aware of where the issued annuity contract should be sent and inform the agent to send a copy of the contract to the administrator.
- Since the trust is always the owner of the policy, inform the insurance company that correspondence regarding quarterly and annual tax accounting should be sent to the administrator.
- Make the insurance company aware of any unique valuation requirements of the CRT.
- Inform the insurance company that valuations must be received by the administrator on a timely basis, and must be flexible to alternative arrangements as dictated by the trust.
- Inform the insurance company if you do not want a withdrawal from the trust when its value has fallen below basis and the withdrawal causes a penalty to be incurred or principal to be improperly distributed from a net income trust.
- Make certain that the insurance company and administrator are able to complete routine tasks without the intervention of the trustee.
- Inform the insurance company that the administrator will determine distributable net income and communicate this figure for each payment cycle.
- Make certain that the insurance company will notify the administrator of any withdrawal penalties caused by a withdrawal, and make certain that payment checks are dated in the correct quarter.
- Make certain that the insurance company will advise the administrator when any additional deposits are inadvertently sent directly to the insurance company instead of the administrator.
These concerns must be addressed before deciding upon an annuity product or an administration company.
To help you in the selection process, Renaissance has assembled a list of participating companies offering products that have the necessary features to work effectively within a NIMCRUT. These companies have entered into a relationship with Renaissance to expedite administrative issues involving a NIMCRUT invested in an annuity contract. These companies offer suitable products, understand the administrative issues listed above and work effectively with Renaissance Administration LLC. The list is found in this manual, in the "Conforming Products" section. These are the products qualified for participation. This careful screening of products and companies for inclusion as a "conforming product" is an important means for Renaissance to increase your client's peace of mind.
Other critical elements in the performance of your client's trust are discussed in the section: "Why You Need an Integrated System."
