Example

John, age 85, and his wife Betty Jean, age 60, decide that an annuity is in their best interest. They can receive tax-deferred accumulation, limited access to their monies during the five year surrender charge, and total access to their money at the end of five years.

John names himself as owner of the annuity contract. Since the insurer requires the annuitant being younger than age 85, John names his wife, Betty Jean, as the annuitant. Naturally, he names himself as beneficiary since he has chosen an annuitant-driven annuity contract that will pay the death benefit to the beneficiary if the annuitant dies.

Three years later, Betty Jean, unfortunately, dies and the death benefit will be paid to John as the beneficiary

Since the distribution at death rules that allow a spouse to continue the annuity apply only to death of owner and not to death of annuitant, John cannot continue tax-deferred accumulation indefinitely. As a result, he is considering surrendering the annuity and paying income taxes on the gain or annuitizing and receiving tax-advantaged income based on an exclusion ratio.

What can be learned from this example? If John had selected an owner-driven annuity contract instead of an annuitant-driven contract, which also allowed him to change the annuitant, John could have named one of his adult children as the new annuitant and continued tax-deferred accumulation.