Beware the Danger of Jointly-Owned Annuities

One of my pet peeves is how the financial planning industry had allowed itself to be consumed by the investment advisory industry. The two are not the same!

Financial planning is truly ALL encompassing, taxes, insurance, investments, college, debt, estate etc. are all part of the discussion.

What’s investment advice though? Well, simple, INVESTMENTS!

Investments are part of financial planning but financial planning is so much more.

Yet, because most financial ‘advisors’ get paid on the investments they manage, it’s easy to see how the two get mixed up.

I wish this weren’t the case. I wish we truly had an industry where clients value what a financial advisor does, in terms of seeing the big picture as opposed to just managing investments.

But that industry is starting to spring up. Groups like XY Planning Network (which I’m a part of), Garret Planning Network, NAPFA are doing wonderful things to advance of the cause of true financial planning.

The problem, of course, is that many people have been trained to view financial planning as investment advice and thus feel they don’t need to seek ANY financial counsel. After all, they can just go to Vanguard or something.

Yes, but does Vanguard or the other firms, actually do Financial Planning??? Do they look at your 1040, your estate documents, your insurance illustrations, your FAFSA, your debt etc…?

This is not a slight on Vanguard by any stretch, as they offer a wonderful service for what they do… INVESTMENT ADVICE.

But most people need more than that, and yet they don’t know it.

So, they have no Durable Power of Attorney. Or they have what they think is an irrevocable trust when in fact, the front page of the trust states explicitly THIS TRUST CAN BE REVOKED BY THE GRANTOR. Or they just default to take Social Security at 62 without even the slightest understanding. Or they’ve been divorced and don’t understand they can get MORE on their benefits by filing for Spousal benefits. Or they don’t see the HUGE opportunity to pay a bit more tax now in order to pay so much more less in the future. Or they don’t know that by doing X this year will affect their financial aid 2 years from now… etc. etc. etc.

The list goes on and on and on.

Hardly any of these discussions revolve around Investment A vs. Investment B and yet it is so much more important because if you overlook these things your whole plan could sink.

Don’t do that. Get a financial advisor to look over your situation. Yes, it will cost you something. Guess what? It’s worth it.

Jointly owned annuities have serious negative implications ALL investors need to be aware of.  I’ve been in the investment advisory business for over 20 years and I was ignorant of this issue until I read Michael Kitces article here:    An excerpt:

In a scenario, with joint ownership of an annuity, the contract must begin to pay out NOT upon the death of the last surviving owner, but immediately upon the death of the FIRST OWNER TO PASS AWAY.(my emphasis)

Now remember you can’t have joint-owners on an IRA or other retirement account.  Those accounts must be individually owned. So, anything that is jointly owned inherently means it’s a non-IRA account.

And this where the huge problem comes with annuities.

Huge Problem With Jointly-owned Annuities

Let’s say I own a non-IRA account with my wife, Charlotte, and name my daughter, Maddy, as beneficiary. When I die, in the normal order of operation, Charlotte takes over a sole owner.

The account is joint-owned, one owner dies, the other still owns it. But apparently that is not necessarily the case with annuities.

In this case, as Kitces states:

not only will the death of the first owner mean the beneficiary is required to begin post-death required minimum distributions from the contract (even though the joint owner is still alive), but the joint owner can be outright disinherited! Even worse, if the surviving joint owner had partially contributed funds to purchase the annuity, then that joint owner will be required to file a gift tax return to report his/her share of the annuity that was just “gifted” to the beneficiary!

This means that Charlotte gets nothing and instead Maddy gets the annuity!  Even though Charlotte is an owner and Maddy is only the beneficiary. But wait…there’s more!

If Charlotte contributed money to the annuity she actually needs to file a gift tax return for the gift she made to the annuity that went to Maddy, even though Charlotte is still alive, is an owner and even if she needed that money!

I know the tax code is nuts but this is pure insanity. One of the owners is STILL ALIVE yet that owner could LOSE her own money to the beneficiary under some annuity circumstances.  This absolutely boggles the mind.

But here’s the thing.  How many people actually know this?

What Say The “I Hate Annuities” Guy?

Have you ever heard of Ken Fisher?  He’s the “I Hate Annuities” guy.  If anyone should know about the insanity that comes with owning a jointly owned annuity, it should be the “I Hate Annuities” guy, no?  But I’ve yet to hear him discuss this aspect of annuities. Here’s an article why he hates annuities, has nothing to say on the complexity of jointly owned annuities.

So, if even someone who has built a rather large investment empire by touting his “hate” of annuities has failed to tell his readers of the insanity of some ownership structures how the heck is the average investor going to know?

After all, I didn’t know about this! I’m 20 years in the business with a CFP and a Master’s in Personal Financial Planning.

Sidenote: Don’t Make Your Estate Your Beneficiary

It’s scary stuff folks.  And something you should not take lightly when you are considering an annuity.  (On a side note, you ALSO shouldn’t just leave your annuity to your estate, as opposed to a real human being.  I won’t get into the reasons why here, but the ONLY reason an annuity names a beneficiary as the estate is because the salesguy wanted you to hurry up with the paperwork. There really is no other reason.)

 What Does Your Annuity Company Require?

Now before we all panic.  Kitces does say:

some annuity contracts indirectly prevent this especially unfavorable outcome, by contractually stipulating that any time there is a surviving joint owner, the joint owner is presumed to be the primary beneficiary, overriding any other beneficiary designation form. This would allow the surviving spouse to continue the contract after all… but only if the particularly contract in question actually includes such an override provision!

After reading the article, I called TWO annuity companies, PacLife and Delaware and asked how they handle jointly owned annuities. Both said they allow for spousal continuation. Meaning that if I die, Charlotte assumes ownership of the contract and can do whatever she wants with the account.

Now, be advised, I do not know if ALL PacLife or Delaware annuities are okay for the joint owner.  I can only speak to what I was told me and the research I did when looking through contracts. Maybe the phone center person was wrong. Maybe my understanding of the contract was wrong too.

I highly suggest if you have a jointly owned annuity to do your own investigation about what happens when one spouse dies. I’d suggest you get something in writing too. Or at least be shown exactly WHERE in the contract it states the joint owner assumes ownership when the other owner dies.

Reconsider Jointly Owned Annuities

Or how about this…don’t have a joint annuity to begin with. The reason most people have joint accounts is to avoid probate. I own the property with my wife, at my death it becomes her property, pretty standard stuff there.

With an annuity and/or IRA and/or life insurance, you name beneficiary designations which serves to avoid probate. I die, my annuity goes to my named beneficiary. Again easy as pie.

The only thing the non-owner has sacrificed here is his/her ability to take action on the account while the owner is alive.  However, a properly executed Durable Power of Attorney can solve that issue.

Let’s say I own my annuity individually. I name my wife as beneficiary and we have a properly executed Durable Power of Attorney on file with the insurance company.

In this set up, if I die, Charlotte simply calls up the annuity company and gets the proceeds.  If I am injured and she needs to do something in the account, she can, because she has the Power of Attorney.  If she dies first, nothing changes because I own the annuity to begin with. Then I just need to change my beneficiary.

In this set up, we’ve avoided the trap of a jointly owned annuity bypassing the surviving spouse and going directly to our beneficiary and yet we’ve retained pretty much all the benefits of joint ownership.

Moral of the story: Next time you’re thinking of a buying an annuity and the salesmen says “why don’t you make it jointly owned?” Run, don’t walk, RUN for the hills!

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