A living trust is set up to protect a person's assets from probate, a legal process to determine the validity of a person's will. A revocable living trust is one that the trust's creator, or grantor, can revise or dissolve while still alive and competent, but once a grantor dies, the living trust automatically becomes irrevocable. A living trust often will protect the grantor's assets from estate taxes and allow for a smooth legal transfer of the assets to the trust's appointed beneficiaries. An annuity is an insurance product set up to provide income for one or more recipients, which the purchaser may choose to protect within a living trust.
Annuities Owned by Living Trusts
If a person purchases an annuity to provide income for a specific beneficiary, the purchaser may choose to place that annuity within a living trust. Should that person become incapacitated, a successor trustee can take over the oversight of the trust, and thus the annuity. In this case, the control of the annuity would pass on to the successor trustee without a protracted conservatorship process.
Because most annuities already have a payable-on-death clause to dissolve the annuity upon the purchaser's passing, avoiding probate is rarely a reason for placing an annuity within a living trust. Instead, the benefit of placing the annuity within the trust allows a person assurance of control over the annuity, even if that person is no longer able to manage the annuity personally.
Avoiding Lump-Sum Distribution
In the event of the death of the purchaser of an annuity, the beneficiary typically has the option to receive distribution of the remainder of the annuity in a lump sum. If the purchaser of the annuity has concerns that the beneficiary might squander that inheritance, the grantor can place the annuity into a trust wherein the successor trustee will maintain control over the annuity after the passing of the grantor. In this manner, the annuity payments can continue to the heir as scheduled.
Annuities and IRAs
While an annuity cannot be held as an Individual Retirement Account investment for tax purposes, a person can place an individually-owned annuity into a living trust with his spouse as the beneficiary. Should the owner of the annuity pass away before the spouse, then the lump-sum payout of the annuity within the trust can be rolled over into the spouse's IRA if desired. By placing that annuity into a living trust, the annuity can otherwise provide for the spouse until her passing, then the payments can subsequently be passed on to her beneficiaries, such as her children.
- Annuity Advantage: How Can a Living Trust Help Me Control My Estate?
- Dugalic & Landau: Living Trust with Annuities (PDF)
- Elder Law Answers: Annuities and Medicaid Planning
- State Bar of California: Do I Need a Living Trust?
- American Association of Retired Persons: 10 Things You Should Know About Living Trusts
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