How you may potentially benefit from 2-3 generations of tax deferral.

Annuities May Provide Trusts with Numerous Tax-planning and Wealth-transfer Benefits
Based on the writings of Shane M. Reniker, CFP®, CFS®, MBA The information contained here is the views and opinions of the author and not necessarily those of Pacific Group Advisors or Global financial Private Capital.
Trustees face challenges today from volatile markets and correlated asset classes, and continue to be tasked with driving growth, preserving capital, and controlling taxes and expenses. Trusts can benefit from the same features that individuals find in annuities: tax deferral, income control, and diversified investment options.
Why use annuities in trusts?
In this issue of The Edge:
•	Phase 1: Accumulation
•	Phase 2: Distribution
•	Phase 3: Post Death Planning

Phase 1: Accumulation
1.	Tax Deferral: In some cases, current investment income can be the last thing an income beneficiary desires or needs. Income retained in the trust is subject to comparatively higher trust income tax rates. Income can be passed to beneficiaries to lessen the trust tax effect, but this may be undesirable as well. Distributions reduce the size of the trust and can impose an added (and perhaps unwanted) income tax burden on the income beneficiary. For irrevocable trusts, passing income to the income beneficiary also moves funds that are outside of an estate, and free from estate tax, back in to a potentially taxable estate.
	Trusts are subject to more compressed tax brackets than individuals (see below). The threshold to eclipse the top trust tax rate of 43.4% (39.6% + 3.8%)1 is only $11,950 of income.2 For example, a $1 million trust would only need to generate 1.2% ($12,000) in retained earnings to be subject to the top trust tax rate.
	2013 Single $0 - $8,925 10% $8,926 - $36,250 15% $36,251 - $87,850 25% $87,851 - $183,250 28% $183,251 - $398,350 33% $398,351 - $400,000 35% $400,001+ 39.6%
	2013 Trust Tax Rates $0 - $2,450 15% $2,451 - $5,700 25% $5,701 - $8,750 28% $8,751 - $11,950 33% $11,951+ 39.6%
2.	Income Control: An annuity can also provide the trustee with control over the recognition of income. Many trust-owned annuities are eligible for tax deferral under IRC section 72(u). With a tax-deferred Jackson® annuity, a trustee can request a distribution when income is needed and otherwise avoid recognizing income from the annuity if it is not needed.3
3.	Simplified Management and Reporting: When a trust is initially funded, the asset allocation is typically based on the terms of the trust, the long-term objectives of the trust, and the current economic environment. Over time, however, the allocation of the trust assets may need to be changed or modified. For many investment vehicles, a reallocation of assets may result in additional transaction costs, and the sale of one asset to buy another may trigger capital gains taxation.
	If using a variable annuity as part of the trust investment strategy, the trustee has the flexibility to choose from over many investment options. Because the investment options are held within the variable annuity, the trustee can change the asset allocation without triggering additional transaction costs or capital gains.4 By using annuities in the accumulation, distribution, and post-death planning phases of trust ownership, there is potential for 2-3 generations of tax deferral! 1 IRC §1411(a)(2). 2 IRC §643(a). 3 IRC §72(u)(1). 4 Fifteen free transfers per year. 5 A triggering event for trust dissolution purposes can be any legal event that is written in the trust or as directed under state law. 6 In order for a person to be listed as the annuitant, the individual must qualify as a beneficial owner (i.e., income or remainder beneficiary readily identifiable from the trust document). 7 IRC 72(t) and (q). This material is meant for educational purposes only. We do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Always consult an independent advisor as to any tax, accounting, or legal statements. These retirement strategies are intended only to alert you to strategies that may be appropriate for the circumstances described. Always consult with a lawyer and/or tax specialist before adopting or rejecting any strategy. Only a lawyer and/or tax specialist, after thorough consultation, can recommend a strategy suited to anyone's unique needs. Annuities are long-term, tax-deferred vehicles designed for retirement. Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Annuities are backed by the claim paying ability of the issuing company.