Ohio National Financial Services, Annuities

In either type of contract, however, the funds must be distributed when the owner dies, which may create undesirable results – including unintended income and gift taxes – unless the ownership, annuitant, and beneficiary designations are properly structured.

In owner-driven annuities, if the annuitant predeceases the owner, the contract is unaffected.

In annuitant-driven annuities, however, if the annuitant predeceases the owner, the funds are paid to the beneficiary, which may not be what the owner intended.

As noted, annuities should be structured to produce the greatest possible flexibility when death benefits are paid, and the lowest possible taxes and penalties. So structuring must be addressed before investing – although either type of contract allows beneficiary changes.

Example: To illustrate the potential pitfalls of careless structuring of annuity-driven contracts, consider Bob and his wife, Ann, who are joint owners of an annuitant-driven contract of which their three children (all under age 59 1/2) are the beneficiaries and Ann is the annuitant. What would happen if Ann dies? Bob may assume he would retain control of the money, as before; but he'd be wrong. The three children will get all of it.

If an annuity is not structured in a way that produces the result the client intended, the client may experience adverse tax consequences. Advisers should encourage clients to consult with qualified legal or tax advisers for information regarding the tax ramifications of their investment decisions.

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