This article first appeared in the summer 1996 issue of the Expert Witness.
In the previous edition of The Expert Witness our contribution discussed annuities in general as well as some features that qualify annuities as the ideal tool to deliver a specified sum to a specified party at specified times. Whilst the ultimate purpose of this series is to provide users with an effective understanding of how they can use structured settlement annuities, a thorough background in annuity options may be helpful, not only to the litigation counselor in the remediation of tortous actions but also to the estates and wills practitioner. This article will address how the use of “non-commutable” terminology can give fluid expression to the wishes of the annuity settlor.
The settlor of a trust, intent on generating periodic payments rather than lump sum cash to a beneficiary, will most certainly face some onerous costs in an attempt to achieve an expression of his/her desires. But a cost far greater than that of disbursements for legal fees, fund management and trust costs are those costs associated with the failure of the trust to perform financially to the expectations of the testator. Most practitioners are familiar with the occasional inadequacy of investment performance, especially when considered net of costs and fees, but the biggest land mine in the path of the testator’s plan is the potential for litigation and the ultimate insufficiency of the trust to achieve the settlor’s wishes.
The inclusion of a simple irrevocable clause within the terms of an annuity contract may preclude such failure.
Income versus Capital
In all too many circumstances, the beneficiary has and may exercise, the litigation alternative to a trustee declared proviso for trust income or partial trust income. A dissatisfied income beneficiary may, possibly without expense to himself/herself, attack trust capital. Even in the event that the beneficiary might be unsuccessful in such an endeavor, that endeavor may be at the expenses of the estate or trust.
A “non-commutable” annuity, however, may not and cannot be converted to cash. This proviso within an annuity may or may not be ascribed to the initial payee under such contracts. In addition, the provision may apply only to the primary beneficiary or payee or possibly to both the primary and secondary right holder but not to a subsequent right holder. Once an annuity settlor has dealt with the issue of potential income beneficiaries, he or she may elect that the subsequent right’s holder (beneficiary or payee) be entitled to commute the then present value of the annuity payments.
A testator, facing the uncertainties with respect to the execution of his or her wishes under the terms of a trust, may find that an annuity represents a refreshing alternative especially when one considers the fact that the annuity contract is without additional costs or fees.