Annuity Mix-Up

I need some help understanding some annuities that I believe were setup in error.

My wife's grandmother (kids great-grandmother - GG) initially set up the annuities for the benefit of my kids (K). They were setup in 1992 and 1994. GG passed away in 1996. The K grandfather (wife's father - G) took over as the responsible party on the account. G had a stroke several years back, and now cannot help in terms of remembering the details surrounding the account setup or even to help try to rectify any problems.

The account lists G as the certificate owner, with a DOB in 1933 (currently 75). The original contracts were 7 year fixed, and both were rolled over to new contracts in 2000 (don't know why, except there were hefty fees incurred to do the rollover, quite possibly for no reason other then to benefit the accountant who handled this matter.) The new contracts state they are non-qualified certificates.

The K's are listed as the annuitants, with annuitization commencement dates of 2066 and 2068, which would be when they turn 75. This alone makes no sense to me, since most annuities I read about use 59 1/2 as a trigger for receiving income, not 75.

Worse, if I read these contracts correctly, the K's have no interest in the annuities at all. Only the G does, and he would not start receiving income until 2066 and 2068. Since he likely will not make it to 133 years of age, then these annuities would pass to his beneficiaries or his estate, quite possibly bypassing the K's entirely (G remarried and his estate would likely go to 2nd wife and her family).

Both the K's are still under 18, so I don't think there is any statute of limitations issues should I need to take legal action to resolve this.

I need some input to see if I am on the right track and if I am some suggestions as to the best way to fix the problem. I seriously suspect malpractice on the part of the accountant who set up this investment. He seems to be the only one making anything off of it. But at the very least I need to find out if I am interpreting things correctly.

The grandfather is the "OWNER" of the accounts, but the children are the annuitants and MOST likely, the BENEFICIARIES of the annuities. When Grandpa passes, they will inherit the funds inside and they can take them out without penalty, but will owe income tax on the growth. Of course, they are young children and the will be taxed at THEIR income bracket (which may be 0) for the GROWTH only.

Non-qualified simply means that the cost basis (principal invested) is not taxable and they are not treated as retirement accounts under the IRS guidelines.

The OWNER (G) "owns" the annuity, the money in it, and the right to change beneficiaries on the account. The ANNUITANT is simply the person whose mortality table would dictate a lifetime income IF chosen. The BENEFICARY (most likely K) will get the money upon the death of the owner (G).

Also, if they were 7 year contracts taken out in 92 & 94, then the transfer in 2000 was likely a 1035 exchange and cost nothing and were not any "hefty fees" nor taxes for doing so. The accountant may have paid again to execute the transfer, but it is irrellevent if it cost nothing to the client for doing so. In fact, the transfer was probably done to achieve a higher interest rate. It is very much like rolling a CD over. It is done all of the time.

The annuity commencement date means nothing. It has nothing to do with how the funds are ultimate disbursed. They (K) can choose to cash them in when they inherit them (they have 5 years to do so without the 10% penalty), let them grow tax deferred until they reach 59.5 years old and use them to supplement retirment, or annuitize them someday (most people NEVER annuitize a deferred annuity).

I think that you may have a slight misunderstanding of annuities. They are simply a tax-deferred way to save money. If the intent was to pass them to the grandchildren, it will happen. The grandparents simply earmarked the money for the grandchildren while maintaining ownership and the ultimate right to spend it themselves. Meanwhile, they have avoided years of income taxes on the interest and using a beneficiary designation have ensured that the children will receive their inheritance without hesitation nor DISPUTE. The designations CANNOT be refuted or challenged.

There has been no wrongdoing. In fact, the grandparents were wise to use them. They are inherited with some restrictions (good for young adults), they are still under control of the grandparents (the money is STILL theirs), and they are passing the annual taxes onto the heirs instead of paying themselves.

Hope this helps to clear things up.