The Ideal Annuity
Once you and your client have decided to invest Charitable Remainder Trust assets in a deferred annuity contract, how do you choose the right annuity product and issuing company? The annuity product should contain features that allow the trustee or Independent Special Trustee (IST) the flexibility outlined in the trust document. The annuity product should NOT contain restrictive features that can limit income distributions or create negative economic impact on the charitable remainder interest. The following criteria for product specifications are extremely important to overall client satisfaction and trust performance. These specifications do NOT consider investment options with the separate accounts associated with a variable annuity. Investment options should be discussed with the client after selecting the issuing company based upon product features.
The first set of features is called Product Requirements. These features or benefits are critical considerations when determining which annuity product to use. The second set of features are additional considerations designed to make an annuity product more flexible for use in the CRT market. Renaissance recommends these features and benefits. Insurance companies requesting their product for the Renaissance Product list must include the required features and meet the administration system requirements outlined in section "Why You Need An Integrated System" of this manual.
Product Requirements
Penalty Free Withdrawals in Year One
The trustee may need or want to distribute income from the trust shortly after assets have been invested in an annuity contract. Distributions from the annuity contract may be needed to pay for administration costs associated with a CRT. Annuity contracts that do not allow penalty free distributions during the first year create situations that can have a negative economic impact on the income beneficiary and the charitable remainder interest. The trustee or IST has a fiduciary responsibility to act in the best interest of both beneficiaries. Taking action or making an investment on the part of the trustee or IST that could result in a negative impact to a beneficiary would not be considered prudent.
Free Withdrawal of Accumulated Earnings
Many times the trustee or IST wants to defer income within the trust for a number of years. The trustee may then "makeup" for past payments by taking larger annual withdrawals or a single lump sum payment (not to exceed the amount in the makeup amount). The standard 10 percent per year free withdrawal feature contained in most annuities does NOT meet the needs of the trustee or IST, and directly conflicts with the flexibility of the Net Income with Makeup Charitable Remainder Trust (NIMCRUT). Since the NIMCRUT will not allow the trustee to dip into principal to make income payments (although principal can be used to pay administration expenses of the trust) the base investment in the annuity contract is protected. The accumulated 10 percent free withdrawal feature found in some annuity contracts does not provide the level of flexibility needed to meet the potential income distribution needs of the trust.
Quarterly Penalty Free Distributions Beginning in Year One
Most CRTs allow for quarterly income distributions to the named income beneficiaries. The Standard Charitable Remainder Unitrust (SCRUT) must distribute income during the first year. Administration fees are generally charged to the trust on quarterly basis. Annuity contracts that only allow a "once per year" distribution free of any processing fees or penalties hamper the flexibility of the trust.
Annuitization Age
The trustee or IST is prohibited from annuitizing an annuity held as an investment inside a CRT except for extremely limited circumstances. Contracts that force annuitization at an age sooner than normal life expectancy will force the trustee to liquidate the annuity and find alternative investment options. Renaissance recommends an annuitization age of 95 or more, subject to state insurance department regulations.
Product Recommendations
Contingent or Co-annuitants
Most CRTs include multiple income beneficiaries such as a husband and wife. The trust does not terminate until the death of all income beneficiaries or a stated term of years. A payment to the trust from the annuity company due to the death of the named annuitant could create something different then the expected result; eg. NIMCRUTs with a current income deficiency account would be required to make a distribution to the extent of any gain over basis in the annuity contract. The remaining income beneficiary might not need or want income at the time income is unintentionally created in the trust. Products that allow co-annuitants or contingent annuitiants will provide more flexibility to the trustee and income beneficiary.
Additional Annuity Product Features
Benefits and features that increase the mortality and expense factors of annuities make the annuity less attractive, particularly for large cases. For example, a generous death benefit with an annuity is a relatively unimportant feature when used as a funding source for a CRT because it will not benefit the income beneficiaries and may not increase the ultimate gift to charity.
