Frequently Asked Annuity Questions

Should an annuity contract be annuitized to generate lifetime income?
The answer is NO! When an annuity contact is annuitized for a "life income" option or "life income with a period certain," the remainderman (charity) most likely will not receive a remainder interest if the annuitant dies before enough annuity payments have been received by the trust to recover the principal in the contract. In addition, only the interest element of each payment is counted as trust income This could lead to the trustee being held accountable for improper handling of trust assets.
Although not a good option, periodic annuity payments based upon a "period certain only option" could be used. However, only the interest portion of each payment to the trust from an annuitized annuity contract would be distributable net income to the beneficiary based upon the stated payout rate of the trust and the balance would become part of the trust principal.
Partial withdrawals and partial surrenders from an annuity contract are not considered periodic annuity payments.
What are the consequences of doing a 1035 exchange from one annuity contract to another annuity contract inside a CRT?
A 1035 exchange will not jeopardize the qualification of a CRT. However, the difference between the tax accounting and the fiduciary accounting treatment of a transaction within a CRT may create an unexpected result if one annuity contract is exchanged for a new annuity contract. There are several issues that could adversely impact the income beneficiary of the trust and that need to be understood.
  1. An annuity contract owned by a non-natural person such as a CRT is not recognized as a tax-deferred investment for tax purposes. Any increase in the value of the annuity contract must be recognized as ordinary income and recorded in the appropriate tier each year. However, as long as the owner of the annuity contract is a tax-exempt trust there is no income tax due. So for income tax purposes the 1035 exchange is unnecessary. However, income tax consequences are only one-half of the equation. For NIMCRUTs, equal consideration must be given to the determination of distributable income (or fiduciary accounting income). The reason to do a 1035 exchange of a contract owned by a CRT is to avoid creating distributable income. An argument can be made that the transfer of annuity funds directly between two annuity companies avoids the receipt of cash from the annuity by the trustee, and thereby avoids the production of distributable income. One result of this exchange is that the investment in the contract remains constant. In contrast, if the trustee of a CRT surrenders an annuity owned by a NIMCRUT rather than doing a 1035 exchange, this transaction will create distributable income to the extent that the surrender value of the contract exceeds the investment in the contract. To the extent that the surrender value is less than the investment in the contract, the new contract will establish a new investment in the contract for the purpose of computing future amounts available for distribution.
  2. If the trustee does a 1035 exchange from one annuity company to another annuity company the full value of the exchanged annuity contract may be treated as premium by the new annuity company for purposes of applying any surrender penalties. This could make it impossible to create distributable income without incurring surrender penalties.
  3. For purposes of fiduciary accounting, net distributable income is recognized and paid to the appropriate income beneficiary when income is actually received by the trust in the form of a partial withdrawal or surrender as defined by trust language. Because income for federal income tax purposes is recorded each year, but income for fiduciary accounting purposes is only recognized when there is a withdrawal in the contract, there is generally a difference in the federal income tax basis of the contract and the amount tracked as the investment in the contract for the purpose of computing amounts available for distribution
How should the trustee handle withdrawals from the annuity contract to make income payments?
All requests from the trustee or Independent Special Trustee (IST) for withdrawals should be forwarded to Renaissance. Renaissance has made special arrangements with the "Conforming Product List" companies to process withdrawals.
Renaissance will request the withdrawal from the annuity contract, receive the payment to the trust and make the corresponding payment to the income beneficiary. Renaissance will verify the accuracy of the withdrawal and make sure that the payment from the annuity contract did not come from principal or exceed the amount available as income to the beneficiary from the current year distribution or make-up account.
How are death benefits from an annuity contract handled by the trust?
Death benefits are paid to the trust. Should the death of the annuitant cause the trust to terminate, Renaissance will make the distribution to the charitable remainder beneficiary.
In cases where the trust will continue to make income payments to successor income beneficiary(ies), the trust will distribute the makeup amount to the extent the death benefit exceeded principal in the trust and ask the trustee to re-invest the balance.
Will a joint annuitant feature allow the surviving income beneficiary to continue deferring trust income?
The use of joint annuitants appears to eliminate the potential problem of a forced distribution from the makeup account at the death of the named annuitant. The joint annuitant provision will allow the surviving annuitant to continue to defer income with the annuity contract.
When does a donor-trustee need an Independent Special Trustee (IST)?
Renaissance strongly recommends an IST to handle annuity transactions in a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT). The IST should apply for the annuity contract and be responsible for requesting withdrawals and partial surrenders. Renaissance's position is based upon Internal Revenue Service rulings and the 1998 technical advice memorandum (TAM 9825001) concerning income deferral in a NIMCRUT.
Although the TAM and private letter rulings are non-binding by the IRS, they do indicate the IRS's position that the income beneficiary should not have control over the investments to defer income. An IST is not needed for Standard Charitable Remainder Trusts (SCRUTs) investing in annuity contracts because the trustee has no control over the creation or deferral of income from a SCRUT.
An IST performs a variety of duties when a NIMCRUT is invested in an annuity contract.

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