Can a Broker be Liable for Tax Consequences Arising from an Ill-Advised Annuity Liquidation?

I have been asked whether a broker can be liable for tax consequences from an ill-advised annuity liquidation. In short, the answer is “yes.”

Improper annuity liquidations are a serious problem. Annuity contracts are complicated and vary greatly. Your tax consequences differ depending on the annuity and when it is liquidated. If you liquidate your annuity it may be treated as ordinary income and, depending on the size of the annuity, place you in the highest tax bracket for the year of liquidation. Conversely, taking distributions over many years may allow you to avoid being taxed at a higher rate. In addition, if your annuity is tax deferred, the liquidation may be an early withdrawal (depending on your age) and subject you to additional tax penalties as well as separate surrender fees from the annuity issuer.

A stock broker or financial advisor who fails to warn you about the tax consequences resulting from an annuity liquidation can be found liable for your damages under a variety of common securities claims such as breach of fiduciary duty, securities laws, consumer protection laws, negligence, and misrepresentation.

Any liquidation should be closely analyzed with your financial professional, your accountant, your attorney, and the annuity issuer.

Financial advisors must have a securities and insurance license to advise clients on variable annuities. To obtain these licenses, advisors receive training on tax consequences associated with annuities. As such, in addition to common sense, your advisor is on specific notice of the serious tax consequences associated with liquidating annuities and has an obligation to warn you about this. If the broker fails to do so and you suffer tax consequences, you should speak with an experienced securities attorney immediately.