2013 annuity cheat sheet

By Ryan Parker

Bankers Annuity Brokerage

This year has started with much more of a bang than a whimper, which suggests that the new year could be a great one for the annuities market after 2012’s troubled run. Between portability rules, deferred annuities getting hit by fresh tax changes, and a number of annuity brokerages diversifying their offerings, it can sometimes be tough to keep track of the major company and governmental changes. Here’s a quick cheat sheet for two of the biggest changes hitting occurring in 2013.

Deferred annuities may become less attractive due to recent tax changes

As noted in the article “How Washington Is Killing Deferred Annuities” published by the Journal of Financial Planning, there have been a few significant changes in the tax code that may diminish the benefits wealthy clients receive from deferred annuities.

As the authors point out, at the start of 2013, the Bush tax breaks expire, collapsing some of the tax brackets into each other and increasing taxes by approximately 3 percent to 5 percent in each bracket, and up 4.6 percent for those in the highest bracket. This, coupled with the fact that “distributions from annuity contracts made to high-income taxpayers will be subject to an additional 3.8 percent surtax imposed by the Patient Protection and Affordable Care Act of 2010” means deferred payments will be taxed more heavily in 2013. Overall, deferred annuities have become a slightly less desirable option, particularly among wealthy clients.

Bypass trusts are now only necessary in specific cases

The American Taxpayer Relief Act (ATRA), signed temporarily into law in 2010 and permanently into law on January 2nd, 2013 has made it so estate tax exemptions now roll over to the spouse of the deceased. Much in the same way bypass trusts allowed a spouse to ensure that their significant other wouldn’t get hit with a heavy tax burden once their estates were combined, the new law makes it so this happens almost automatically, as long as an estate tax return is filed in a timely manner. This eases estate planning by not only making it less necessary to establish a bypass trust, but also imposing a $250,000 gray area for the "estimated value" of an estate. Detailed appraisals of an estate and its properties are no longer strictly necessary.

As always, it’s important to know what the options are for clients looking at investing in annuities. This recent piece outlines a number of new offerings that are now on the table. In addition to a few of the larger changes to the tax code in 2013, knowing what’s out there and what’s changing is important to making sure you’re offering up the best solution for your clients.

If nothing else, 2013 will likely be a much more exciting year for annuities, and you can make the most of it by keeping yourself well informed and maintaining a healthy dose of optimism.