A. Annuities provide excellent investment vehicles and tax-deferred growth. If you take two investment accounts with the same assets and one is taxable and one is tax-deferred, the tax-deferred account will always do better because it is not paying taxes until the money is distributed from the vehicle.
Annuities are treated similarly to IRAs and qualified plans. The additional advantage of a non-qualified deferred annuity is that unlike a qualified plan or an IRA, no required minimum distributions need to be made during the life of the owner. Once the owner dies, the annuity must begin making post-death distributions to the beneficiary.
Under IRC Section 72(s), upon the death of any owner, the annuity must begin to make post-death distributions to the beneficiary. The Tax Reform Act of 1986 changed the joint ownership of annuity taxation rules to prevent using joint ownership to avoid taxation of the annuity over two lives. This makes annuities distributable whenever one of the owners dies. However, if the other spouse is named as beneficiary, the taxation would then be postponed.
When a surviving spouse is named the beneficiary of the non-qualified annuity, they may continue the annuity in their name. This is very similar to a spousal IRA rollover allowing the surviving spouse to continue to receive tax-deferred growth. If one spouse is the owner but names their spouse as the beneficiary, then the spouse who is named beneficiary can continue the annuity and continue to receive tax-deferred growth in the annuity.
In next blogpost, we will analyze why a joint parent-child ownership also hurts you..