Advanced Marketing Forum Question

QTIPs and Annuities

Question:
Would anyone know if an existing QTIP trust could own a variable annuity? My initial thought is that this would not be a good idea because the trust would mandate that the annuity pays out income (not withdrawals) to the surviving spouse. Would anyone know if there would be a way to avoid this? What if there were other assets in the trust?

Reply:
A QTIP trust may absolutely own a variable annuity and in many cases a VA could be a beneficial investment. A VA held by a trust (non-natural owner) for the benefit of a natural person maintains its tax deferral so this is not an issue--therefore the earnings are not taxable to the trust every year as would be the case when a corp. or other type of trust owns an annuity.

Also, the trust will dictate what the distribution will be. A VA provides adequate liquidity for distribution purposes because many annuity companies allow for yearly withdrawals of 10% of the contract value/purchase payments or all earnings. In addition, "income" for VA purposes is defined as cash withdrawn from an annuity contract so for accounting and distribution purposes there is no income from the VA until the trustee notifies the annuity company and requests a distribution. I would look into VAs with bonus (such as the Venture Vantage which allows for an automatic 4.5% earnings on top of the initial contribution) or VA with short surrender periods (such as the Venture III which allows for complete liquidity after 3 years).

Lena Rizkallah, Esq.
Director of Charitable and Estate Planning Special Markets Department
Manulife Wood Logan

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