- Credit shelter trusts
- Revocable living trusts upon death of the grantor
A case study
Ann Weston has two children
- Jon – son of Ann’s second husband, Robert, and his first wife
- Julie – daughter of Ann and her first husband
- Wish to leave a legacy for their two children
- Upon Robert’s death, trust was funded with $6M
Trustees discusses benefits of using a nonqualified deferred annuity.
What are the benefits?
- Avoids higher trust income taxes until distributed
- Avoids 3.8% net investment income tax, if applicable
- Trustee buys nonqualified annuity contract to benefit trust beneficiary
- Trust is owner and beneficiary of annuity
- Trustee names annuitant
There are two options to consider.
Option 1. Purchase one nonqualified deferred annuity for $1M with Ann as the annuitant
- Trust purchases one $1M annuity
- 50% of death benefit distributed and taxed to Jon at Ann's death
- 50% of death benefit distributed and taxed to Julie at Ann's death
Option 2. Purchase two nonqualified deferred annuities for $500K each
- Jon named as annuitant on one
- Julie named as annuitant on the other
- Trust purchases two $500K annuities
- Jon and Julie each is named as the annuitant of one annuity contract
- Trustee distributes annuity contract to Jon and Julie respectively at Ann's death - no taxation