Dear Mr. Premack: I was invited to a luncheon to hear about investment choices for Seniors, and the lecturer (perhaps I should call him “salesman”) spent a great deal of time trying to convince us to purchase annuities and to consider Living Trusts. What should we know that he didn’t tell us? Thanks – NS
Annuities are an insurance product that can be used for long-term investment purposes or to create a monthly cash flow for the purchaser (called an “annuitant”). A “deferred annuity” gets special tax treatment; there is no income tax on the interest accruing in the annuity until it is paid. Pay out occurs either when the term of the annuity expires, when funds are withdrawn as may be allowed by the annuity contract, or when the annuitant dies.
An “immediate annuity” provides regular payments to the annuitant, consisting in part of return of the invested funds and in part of interest earned. Payments might be for a certain number of years or for the annuitant’s entire lifetime. Sometimes annuities can be a viable option in a person’s investment plan.
When considered simply for investment purposes, deferred annuities are more popular with Seniors than immediate annuities. Annuities have drawbacks the salesman may not have emphasized. For instance:
Deferred annuities have a penalty provision for early withdrawal of funds (though minimal withdrawals may be penalty free). You may lose up to ten percent of your invested principal if you need to take all the funds out before the annuity matures.
Annuities have sales commissions that may be higher than other investments. The commissions are what motivated the lecturer to invite you to a free lunch and are what paid for your lunch.
When considered from an estate planning perspective, annuities are classified along with other insurance products. They are non-testamentary, meaning that any death benefits are paid according to a beneficiary designation on file with the insurance company. That means that annuities do not follow the terms of your Will. You must adjust your estate planning to account for these non-testamentary distributions.
It is odd that the type of luncheon to which you were invited often includes the recommendation that you obtain a Living Trust. Frequently, the speaker may be representing one of the so-called “trust mills” which are located outside of Texas and do not involve use of an attorney. This is their way to steer you away from proper un-biased Texas legal advice and deeper into their clutches.
The reason I describe the combination of annuities and Living Trusts as odd is that they are both non-testamentary. If you buy an annuity, the funds will pass to your designated beneficiaries without probate. That is an inherit quality of an annuity. Thus there is no need to put your annuity into a trust when one reason for the trust is to avoid probate. You have already avoided probate of an annuity.
They must have another motive for discussing trusts. What is it? Their motive is to get you to reveal your financial data during the trust discussion so they can use that data to convince you to buy an annuity. Beware of these luncheons, and remember to consult with your estate planning attorney who will be unbiased and who will preserve the confidentiality of your information. The cost of a free lunch can be very high.
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, August 9, 2013