Inherited NQ Deferred Annuity
I have a non-spouse client who has inherited a non-qualified deferred annuity. There was no beneficiary named. To further complicate the issue they just recently discovered this annuity and the owner passed away 8 years ago. The owner had not started receiving annuity payments.
Questions:
(1) The client was told by her investment advisor she qualifies for a 1035 exchange. I don’t believe this is correct under IRC 72. Am I correct?
(2) Would they have qualified for a 1035 exchange if within 1 year of death?
Permalink Submitted by Justin Melehan on Wed, 2010-12-01 17:20
If I remember correctly, an NQ annuity without a named beneficiary is subject to the 5 year distribution rule. I don’t believe an non-spousal inherited annuity qualifies for a 1035 exchange regardless of the timeframe.
Based on your info, it appears the you are correct and the investment advisor is incorrect. Now you should figure out if there are any penalties for neglecting to distribute the funds within the 5 year timeframe.
Hope that helps.
Permalink Submitted by James Crosby on Wed, 2010-12-01 19:43
Thanks Orion. I have had the penalty discussion with the client and the insurance company for failure to distribute within the 5 year timeframe. Based on the fact that the heirs had not idea this existed and the insurance company has acknowledged they were at fault for not notifying the estate we should be in the clear.