Putting a Variable Annuity in a Trust

Q: I have been told that I should form a Trust, gift substantial funds to the Trust and buy a variable annuity. I would not be taking any income from it but upon my death the proceeds would go to my son...

The one I am looking at has a "lock up" clause that would lock in the value on the anniversary date if it is higher than the amount I put into it. The costs seem to me to be around 2% which is high on $300,000.00.

Would I be better off to buy a no load fund or funds and have the trust pay the taxes each year on the dividends and capital gains, or to get the annuity. The fellow I am dealing with says that I would be saving substantial taxes by using the annuity.

A: The fellow you are talking to is only trying to sell you an annuity.

First, it's true that an annuity inside an irrevocable would prevent the trust from having to pay taxes on the earnings each year. What he didn't tell you is that those taxes are only being deferred and would all be due at once when you die. So you will end up losing 30-40% of it.

Secondly, the earnings are taxed at ordinary income rates, not the lower capital gains/dividends rates.

Third, what is your main reason for the trust?

Can you tell me more about your situation?

Your posted comments on this and other questions are welcome.
If you have a question for Jeff an answer is just a click away.
Find a wealth of information at Jeff's website.