Gays and Lesbians: Maximizing SPIA RMDs for Survivor Benefits

gm-bioWhile traditionally married couples receive Federal tax benefits not all gay and Lesbian couples are so fortunate. There are still 20 remaining states that don’t recognize gay marriage.

The Defense of Marriage Act (DOMA) finally died on June 26, 2013 under a 5-4 US Supreme Court decision declaring section 3 (restricting U.S. federal interpretation of “marriage” and “spouse” to apply only to heterosexual unions) of DOMA unconstitutional. Following this in short order, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled in IR-2013-72 on August 29, 2013 same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

Under Federal law married couples can always receive a maximum 100% survivor annuity (SPIA) benefit. However, you can still maximize the RMD annuity benefit to the gay and lesbian community for individuals in these 20 states if you know the SPIA RMD rules and don’t just accept what carriers are willing to initially issue.

When pricing joint and survivor annuity contracts, many agents just accept as a matter of fact what the agent “field” annuity illustration system automatically produces. This can be a huge mistake if you are trying to maximize survivor annuity benefits for such couples. Typical agent field annuity illustration software only illustrates 75%, 66 2/3% and 50% reductions on IRA holder death (sometimes referred to as a pension joint annuity).   “Non-married” couples have to start reducing annuity survivor benefits when the IRA holder is age 70 or older and the joint survivor is more than ten years younger. And, under certain circumstances, non-spousal joint survivors with IRA holders less than age 70 have to suffer reductions too.  Depending on this age difference dynamic, agent field annuity illustration software will automatically select the provision that most closely matches the maximum annuity survivor benefit that the carrier is willing to initially issue for any particular case. For the carriers’ needs, this automatic selection process insures the IRA SPIA is RMD compliant.

For example, depending on the carrier and how their field agent illustration system is setup, if you have a male, age 72, IRA holder who purchases a joint survivor SPIA contract with his male, age 59, partner chances are the carrier will only initially illustrate one, some or all of the above survivor benefit reductions. And if the carrier illustrates a 75% survivor benefit quote for this case many agents just assume this is the maximum benefit for this couple. However, this assumption is completely wrong. If the couple wants to maximize the benefit then, in this case, the survivor benefit can be as high as 90%! But the agent or insurance marketing organization (IMO) will have to know this and make a special request of their carrier community to determine if one or more are willing to issue the 90% maximum survivor annuity benefit. If a carrier elects to issue a survivor annuity benefit a quote will be forth coming from the carrier “Home Office” illustration system. Yes, carriers have several versions of their illustration systems that are maintained for different reasons. The agent field version is just the starting point.

If agents and IMOs don’t know the IRS RMD tables for SPIAs but just accept what any carrier might issue based on a Cannex (SPIA market) pricing search you will most likely miss the maximums available to such couples. So, the moral of the story is; know the SPIA RMD rules yourself and don’t be hesitant to ask the carriers to issue something you know is RMD compliant.  Whether or not a carrier will issue for your request is another matter. But if you don’t ask you won’t get.

New Podcast Interview

David Macchia's Outstanding Advisor Podcast S01 E04 - Gary Mettler | Outstanding Advisor Podcast #004 >LISTEN HERE<