non-qualified inherited rollover of a non-qualified aannuity

Submitted by Lary Lehman on Wed, 2017-07-26 18:50

I have a deceased client who left approximately $475,000 to her beneficiary who is a sister. There is $135,000
of tax deferred % built up in the plan. My advice to her was to do a non-qualified inherited rollover into an annuity
of her own, and then take the non-qualified inherited rollover RMDs out yearly for her own retirement income.

What types of annuities/mutual funds/brokerage accounts can she move her inheritance to, and move the entire account as a rollover and not get taxed on the $135,000? Is there any vehicle other than an annuity that this will work with?



Submitted by Alan - IRA critic on Wed, 2017-07-26 20:21

If the current carrier offers life expectancy RMDs, that is the best she can do. She cannot roll this over to her own NQ annuity. A 1035 exchange for a beneficiary has been approved in a 2013  IRS PLR, but that would not change her distribution requirements. Unless the annuity is very old, the first 135k distributed will be the taxable gains in the annuity.

Submitted by Lary Lehman on Thu, 2017-07-27 00:36

 Thanks Alan. I have found a few ins co’s that will allow a rollover as a “non-qualified inherited rollover” of a non-qualified annuity”. She must take RMDs based on the Single Life “Inherited” Table out of the new plan. No company will allow an income rider on the annuity. My question is there any other class of investment that will allow it, or is it only allowed to be annuity to annuity to prevent the $135,000 interest from being taxed when the rollover occurs. I understand the distributions will be taxed when they are paid out to her as RMDs based on the Single Life “Inherited” Table. 

Submitted by Alan - IRA critic on Thu, 2017-07-27 01:26

No, the only choice is the 1035 exchange which is similar to a rollover but is not called a rollover. Such an exchange will not result in taxes due from the actual exchange, but taxes will be due on the LE distributions. You might find a carrier with better investment options, but the basic tax situation will be the same as if you took LE distributions from the current carrier. I think the first 135k of distributions will be taxable unless the annuity is very old because the gains come out first. After the 135k is distributed the rest will be a tax free return of the investment.

Submitted by Bruce Steiner on Thu, 2017-07-27 03:25

There is often no good solution to an annuity.  If she cashes it in, she’ll be taxable on the gain all at once.  If she keeps it, she’ll continue to incur the expenses of the annuity, and her future income and gains from it will all be ordinary income.  She can reduce the expenses by a Section 1035 exchange into a less costly annuity, but there will still be some costs, and her future income and gains will still all be ordinary income.

Submitted by Lary Lehman on Thu, 2017-07-27 16:27

 Every Ins co I have spoke to call it a non qualifiedd inherited stretch. The principal and % are “rolled over” to the new co with no taxes. The problem with leaving the proceeds with the old co is that she needs to have 100% of the$ withdrawn in 5 years or less. She needs lifetime income by taking “inherited  She needs to move it to a new policy with the current co or another. And yes there are many benefits to an annuity. Like when the mkt crashes you win by not losing, and the current family of index allocations offer better than a reasonable return.

Submitted by Alan - IRA critic on Thu, 2017-07-27 20:31

Yes, avoiding the 5 year payout is a definite benefit, but you did not indicate that the current carrier required a 5 year payout until now. Before a 1035 exchange is done, be sure that the new currier will allow the LE distributions. The taxable 135k will then come out much slower, and perhaps will not spike her marginal tax rates for the years prior to distribution of all the earnings.

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