Guide to Nonqualified Annuities - RD Marketing Group

[Pages:432]Guide to Non-Qualified Annuities

GENWORTH FINANCIAL ADVANCED MARKETING

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Table of Contents

TABLE OF EXAMPLES .................................................................................................................................................. V

I. INTRODUCTION ......................................................................................................................................................1

II. OVERVIEW OF NON-QUALIFIED ANNUITIES.........................................................................................................1

A. "OWNER-DRIVEN" AND "ANNUITANT-DRIVEN" CONTRACTS .....................................................................1 B. PARTIES TO AN ANNUITY ...............................................................................................................................2

1. Annuitant..................................................................................................................................................2 2. The Beneficiary........................................................................................................................................2 3. Contingent Beneficiary ............................................................................................................................2 4. Life Insurance Company ..........................................................................................................................2 5. Owner.......................................................................................................................................................2 6. Payee ........................................................................................................................................................3 C. OTHER DEFINITIONS ......................................................................................................................................3 1. Accumulation Phase.................................................................................................................................4 2. Annuitization............................................................................................................................................4 3. Annuity Period .........................................................................................................................................4 4. Annuity Value ..........................................................................................................................................4 5. Basis .........................................................................................................................................................4 6. Death Benefit ...........................................................................................................................................5 7. Distributions.............................................................................................................................................5 8. Internal Revenue Code.............................................................................................................................5 9. Maturity Date ...........................................................................................................................................5 10. Natural Person..........................................................................................................................................5 11. Premium ...................................................................................................................................................5 12. TEFRA .....................................................................................................................................................5 D. QUALIFIED VS. NON-QUALIFIED ANNUITIES.................................................................................................6 1. Qualified Annuity.....................................................................................................................................6 2. Non-Qualified Annuity ............................................................................................................................6 E. TYPES OF ANNUITIES......................................................................................................................................6 1. Single Premium Immediate Annuity (SPIA)............................................................................................6 2. Deferred Annuity .....................................................................................................................................6

a. Deferred Annuities Categorized by Premium Payments ..................................................................................... 7 b. Deferred Annuities Categorized by Investments................................................................................................. 7

F. DISTRIBUTION OPTIONS .................................................................................................................................8 1. Amounts Not Received as an Annuity .....................................................................................................8 2. Distributions After Annuitization (Amounts Received as an Annuity)....................................................8

a. Life Only Income Payments................................................................................................................................ 9 b. Life Income with Installment or Cash Refund .................................................................................................... 9 c. Life Income with Period Certain ......................................................................................................................... 9 d. Joint and Survivor Life Income Option............................................................................................................... 9 e. Period Certain ..................................................................................................................................................... 9 f. Fixed Amount ................................................................................................................................................... 10

3. Distributions When a Party to the Annuity Dies ....................................................................................10 G. RIDERS ..........................................................................................................................................................10

1. Guaranteed Minimum Withdrawal Benefit (GMWB) Riders ................................................................10 2. Guaranteed Minimum Annual Benefit (GMAB) Riders ........................................................................10 3. Guaranteed Minimum Income Benefit (GMIB) Riders .........................................................................10 4. Rollup Death Benefit Riders ..................................................................................................................10 5. Step-Up Death Benefit Riders................................................................................................................10

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III. STRUCTURING THE ANNUITY TO MEET THE CUSTOMER'S NEEDS....................................................................11

IV. OVERVIEW OF THE INCOME TAXATION OF NON-QUALIFIED ANNUITIES .........................................................12

A. IRC ?72 GENERALLY GOVERNS TAXATION OF ANNUITIES .......................................................................12 B. OTHER TAX RULES MAY ALSO APPLY........................................................................................................13 C. ANNUITY INCOME IS ORDINARY INCOME....................................................................................................13 D. RULES VARY BASED ON TYPE OF DISTRIBUTIONS ......................................................................................13

V. INCOME TAXATION DURING THE ACCUMULATION PHASE................................................................................13

A. TAXATION OF EARNINGS GENERALLY DEFERRED .....................................................................................13 1. Special Rules If the Owner Is Not an Individual....................................................................................14

a. General Exceptions ........................................................................................................................................... 14 b. Natural Person Exception.................................................................................................................................. 14

2. Making a Trust the Owner .....................................................................................................................16 B. MULTIPLE ANNUITIES (AGGREGATION) RULE ...........................................................................................17

1. General Rule ..........................................................................................................................................17 2. Exceptions..............................................................................................................................................17 C. INCOME TAXATION OF DISTRIBUTIONS (AMOUNTS NOT RECEIVED AS AN ANNUITY)..............................17 1. Surrenders of Annuities..........................................................................................................................18

a. Complete Surrender .......................................................................................................................................... 18 b. Withdrawals and Partial Surrenders .................................................................................................................. 18 c. The Impact of Surrender Charges on Partial Withdrawals ................................................................................ 19

2. Loans Treated as Distributions...............................................................................................................19 D. LOSSES ON ANNUITIES SURRENDERED OR SOLD.........................................................................................20

1. Calculating a Loss ..................................................................................................................................20 2. Reporting a Loss ....................................................................................................................................21

a. Miscellaneous Deduction .................................................................................................................................. 21 b. Other Gains/Losses ........................................................................................................................................... 21

E. WITHHOLDING ON NON-RESIDENT ALIENS ................................................................................................21

VI. INCOME TAXATION DURING THE INCOME PHASE..............................................................................................22

A. AMOUNTS RECEIVED AS AN ANNUITY.........................................................................................................22 1. Taxation of Annuitized Payments ..........................................................................................................22

a. General Rule ..................................................................................................................................................... 22 b. Expected Return................................................................................................................................................ 22 c. Exclusion Ratio or Excludable Amount ............................................................................................................ 23

2. Rules for Specific Types of Annuities ...................................................................................................24

a. Fixed Annuities ................................................................................................................................................. 24 b. Variable Annuities ............................................................................................................................................ 24

3. Annuity in Lieu of Lump Sum Option ...................................................................................................26

VII.INCOME TAXATION OF DISTRIBUTIONS FOLLOWING DEATH............................................................................26

A. DEATH OF AN OWNER FORCES A DISTRIBUTION IF THE BENEFICIARY IS NOT A SURVIVING SPOUSE ......26 1. Distribution Options If Death Is Before the Annuity's Maturity Date ...................................................26 2. Distribution Options If Death Is After the Annuity's Maturity Date......................................................27

B. GENERAL RULE FOR TAXATION OF DEATH PROCEEDS..............................................................................27 C. DEATH BENEFITS..........................................................................................................................................28

1. Death Benefit Equal to the Annuity or Contract Value..........................................................................28 2. Enhanced Death Benefits .......................................................................................................................28 3. No Immediate Tax if Benefit Annuitized...............................................................................................28 4. No Immediate Tax if Benefit Stretched .................................................................................................28

a. Electing Stretch. ................................................................................................................................................ 28 b. First Stretch Payment. ....................................................................................................................................... 29 c. Subsequent Payments........................................................................................................................................ 29 d. Subsequent Beneficiaries. ................................................................................................................................. 29

D. POTENTIAL PROBLEMS IF A TRUST IS THE OWNER OR BENEFICIARY.......................................................30 1. General Potential Problems....................................................................................................................30

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