I believe many annuity agents who enjoy working with SPIAs are missing out on a very large market dealing with minors simply because; they lack the training and carrier support. Many of the very meaningful SPIA cases I have written have been for minors. Excluding litigation annuity contracts (aka structured settlements) market, there is plenty of other commercial SPIA opportunity. First, you need to get the old annuity saw phrase; “guaranteed lifetime income” out of your brain. This contract usage for minors has nothing to do with guaranteed life time income but, has everything to do with safety and wealth preservation.
So, how big is the minors’ market? If you look at all the ways minors come into money, it’s huge. The difference from standard SPIA markets (retirees) is; there are usually intermediaries established by law or rule of law that help direct minor’s assets. So, how do minors who; can’t generate wealth themselves, for the most, part come into possession of such assets. Some inherit as direct beneficiaries of financial products, probate estate beneficiaries, injury awards (for one reason or another that couldn’t be structured), civil suit settlements, outright gifts, etc. In fact, there are probably billions of dollars in this market.
Typically, at age of minority (usually less than age 18), a Uniform Transfer to Minors Act (UTMA) account was established, with a custodian (parent or Grandparent) nominated or for other transfers under judicial oversight; a guardianship/conservator (operating under the “prudent man rule”) was appointed and a blocked account (usually at a bank) created. UTMAs and Blocked accounts have maximum attained ages ranging from 18 – 25 depending on the State, when minors are deemed to become adults, have legal capacity and can now take possession of the account balances.
So, what is the SPIA opportunity? By the time child reaches age 16 – 17 it will become very evident to all about the soundness of the idea of turning large account balance(s) over to young adults who haven’t displayed, up until now, the necessary financial maturity to handle their own financial affairs. Even for well-balanced young adults, account balances exceeding hundreds of thousands of dollars can be problematic to manage responsibly.
A recent case; a client’s (Mom) brother passed away via an automobile accident but he named her 17 year-old son (his nephew) the sole beneficiary of his $750,000 life insurance policy. Mom, after enduring family tussles over the issue, successfully petitioned the court for financial custody and she was named Custodian under UTMA FBO her son (a minor). Sounds good right? How many FAs/Agents out there think it’s a good idea next year to give $750,000 to an 18 – year old? That’s what I thought. The same situation has occurred in probate transfers and of course in civil litigation settlements. In a perfect world, we all know that this shouldn’t happen but we don’t live in a perfect world were beneficiary designations are proper and well thought out and everyone has a will.
So how do SPIAs help in this case? Working as an informal trust, they structure payments to the minor about to turn adult so as to buy time in hopes of achieving his growing financial maturity. In most instances, SPIAs will qualify under the “prudent man rule”. At this point, it isn’t about “investing”. It’s all about preserving the wealth to such a time, the child can make reasonable financial decisions on their own accord. In the case of UTMA, the custodian purchases a short duration, say 10 – 12 year period certain or temporary life annuity contract with or without a payment escalation clause (COLA). COLAs are a great way to create an internal deferral shifting more payout money to later contract years and strengthening the deferral aspects of the contract. The Annuitant is the minor and his/her estate is named the Beneficiary in case he/she doesn’t survive to age 18. At the age of majority (18, again depending on the State) then, and only after the contract “free look” period has expired, the Custodian transfers contract title to the minor/Annuitant now turned young adult. Its imperative the agent knows the annuity contract and the owner’s post issue rights. If the annuity contract doesn’t support a post issue title change then, you can’t use that contract.
Purchasing a SPIA contract while the UTMA Beneficiary is still a minor is a de-facto restriction of the minor’s access to funds rightfully due him/her at age of majority. Not all States recognize the ability of the Custodian to establish a de-facto trust, trust or other estate planning device to accomplish this goal. All parties, including the minor should be aware of the custodian’s actions and at least an informal purchase consent reached.
Let’s consider a Blocked account established by a judge. A minor via the probate or civil litigation process was awarded several hundreds of thousands of dollars. At the time (the minor age 10), the judge order a blocked account established at local commercial bank (again, at this point, this is all about wealth preservation not investing) and ordered the father to serve as Guardian and to report annually on the future account disposition. At age 18, next year, the account reverts to the minor soon to be young adult. Same dilemma as above. In this case, you will need to petition the court and following a hearing, the judge may order the SPIA purchase. This is a different process vs UTMA and depending on the complexity of the local court rules, you may or may not need an attorney to assist the Father.
[Note: For this case (minor age 10) a possible usage for a deferred immediate (deferred income annuity – DIA contract) but, for the most part, from my experience, carriers in this space haven’t been too willing to issue DIAs to this market. And most DIA post issue ownership privileges, contract terms and conditions don’t fit well. All-in-all, very disappointing for the DIA carrier class of contracts!]
Now, at long last, the young adult (age 18) is now the proud owner of an annuity contract(s). So, what’s to prohibit him/her from re-marketing the contract utilizing the annuity factoring markets and receiving a lump sum settlement and thereby defeating the whole intent of the Custodian or the Judge/court in the first place? If utilizing a period certain contract then, at the same time title is changed to the young adult (new owner), the former Custodian is nominated as the contract “irrevocable” beneficiary. You have to know the SPIA contract and if they permit this designation and to what extent the irrevocable beneficiary may exert ownership power. You have to use a carrier that makes owner rights subservient to that of the irrevocable beneficiary. Short of that, you can’t use this contract. While, technically a gift (irrevocable beneficiary designation), there should be no gift tax consequences because of the size of the unified credit (but let’s not get distracted with a gift tax issue).
The irrevocable beneficiary will be able to control all owner’s contact rights to include; future title transfers, naming new beneficiaries and contract assignments keeping the contact out of re-marketers hands. If this isn’t possible then, there is always temporary life. Not too many SPIA agents have written temporarily life annuities. A temporary life annuity (temporary life annuity white paper also available by special request – PM me) is a life contingent annuity contract but only paid over a limited duration say 10 or 12 years with the contract terminating upon the earlier of the Annuitant’s death or the conclusion of the payment period. It is not a lifetime annuity paid out to age 120 that most agents are usually more familiar with. Not too many carriers issue temporary life annuity contracts so, the agent has to hunt around and then find a contract permitting post issue ownership changes. Unlike period certain contracts, because the contract is life contingent, there are no Beneficiary designations. Re-marketers and factoring companies are keep at bay as they will not, as a rule, purchase/lend on life contingent annuity payments.
So, to agent other advantages; beside there never ever being a commission charge back event (vs deferred annuities) and unlike other SPIA business; is the potential for plenty of repeat business! Attorneys specializing in probate, family law, civil litigation will be all too happy to at least hear you out regarding how you may protect their clients and since they have a steady stream of cases you will have lots of opportunities to make new friends.