inheriting annuities

Submitted by Esther Esquenazi on Wed, 2018-04-04 21:37

I recently went to an estate planning lawyer with my parents, and learned they have annuities. My parents were not aware that when the children inherited the annuities, they would have to pay a huge tax, I believe he said something like 40% My parents did not know this, and were quite shocked. They thought because this was an inheritance, the children could receive the money, without tax consequences. The lawyer then mentioned, that the best way to deal with this situation is to stretch the annuities. In other words, the children would not liquidate the annuity, and just keep the policies, and continue. Can anyone give me any idea if this is the right way to handle this situation?



Submitted by Alan - IRA critic on Wed, 2018-04-04 21:50

Are these IRA annuities, or non qualified annuities?  

Submitted by Esther Esquenazi on Thu, 2018-04-05 01:09

non qualified annuities

Submitted by Alan - IRA critic on Thu, 2018-04-05 01:38

Ok, the stretch is the way in which the tax impact can be reduced the most by eliminating large distributions in any single year that would increase the marginal tax rates for that year. Annuities purchased in the last 20 years will incur taxes only on the gains, but the gains will come out first. Once all the gains have been distributed and taxed, then the premiums that have already been taxed to your parents will come out tax free. Possibly, the 40% figure represents the gains in the annuities and not the actual taxes, the rate of which is determined by each child’s marginal tax rate. Annuities that were purchased prior to 1996 may have more favorable distributions rules. 

Submitted by Esther Esquenazi on Thu, 2018-04-05 13:24

  Both of my parents are alive, is  it a good idea to convert these annuities to a better investment, or are the tax consequences too high? Is stretch really the only option? Thank you 

Submitted by Bruce Steiner on Thu, 2018-04-05 13:42

  • There is often no good solution to annuities outside a retirement plan or IRA.  The investment income and gains become ordinary income instead of qualified dividends, long-term capital gains and tax-exempt income, and there is no basis step-up at death.  They also generally have high expenses, typically 2.5% a year, though they can switch them to lower cost annuities.
  • If they keep them and you cash them in after their death, you’ll have a large amount of ordinary income,  You can stretch them out, but in that case you’ll continue to convert the future investment income and gains to ordinary income and you’ll continue to incur the fees.  A compromise that’s often the least bad choice is to take the proceeds over 5 years.
  • Perhaps the least bad solution for your parents would be to cash in the annuities.  If cashing them in all at once would put them in too high a tax bracket, they could do it over several years.
  • If the annuities are in a retirement plan or IRA, then they’re tax-neutral, though they still typically have high fees.  In that case, they can cash them in within the retirement plan or IRA without any tax consequences.
  • Bruce Steiner

Submitted by David Mertz on Thu, 2018-04-05 16:31

  • For nonperiodic distributions from a nonqualified annuity (an annuity not in a retirement plan or IRA), distributions come first from taxable earnings.  Only after the earnings have been distributed are subsequent amounts distributed are a nontaxable return of premiums paid.  Once a nonqualified annuity has been drained of its earnings, the remainder can be taken out immediately without further tax consequence.
  • Before making any distributions from annuities, be mindful of any surrender charges that may not yet have expired.

Submitted by Esther Esquenazi on Thu, 2018-04-05 20:52

      r

Submitted by Esther Esquenazi on Fri, 2018-04-06 02:23

When you stretch an annuity, is it for Life, or 5 years, What is better?If you choose to stretch it for life, do you still get the Death Benefit?In other words the higher amount on the policy.If the trust is the beneficiary of the annuity, and not specific individual beneficiaries, can an annuity be stretched for life, or does it have to be liquidated in 5 years. 

Submitted by Esther Esquenazi on Mon, 2018-04-09 17:28

My parents have a trust, and in that trust there are properties. The trust is set up that each child get a percentage.  I would like to know, do you have to liquidate those properties, and sell them in 5 years, and distribute the money by percentages Or can we keep the properties, for as long as we wish, and rent them.  I  undertand that each child needs to agree. My question is, if we are forced to liquidate the trust, because one lawyer we spoke to said you have to liquidate the trust, and another lawyer said we can keep the properties. So, naturally I am confused.  My next question is that there are annuities in that trust, and I do not belive there are individuals named as beneficiaries. I believe the annuties say trust. Do you have to name an actual person as a beneficiary? I know there are death benefits on some of the annuities.   

Submitted by Esther Esquenazi on Fri, 2018-04-13 06:35

My parents have a trust, and in that trust there are properties. The trust is set up that each child get a percentage.  I would like to know, do you have to liquidate those properties, and sell them in 5 years, and distribute the money by percentages Or can we keep the properties, for as long as we wish, and rent them.  I  undertand that each child needs to agree. My question is, if we are forced to liquidate the trust, because one lawyer we spoke to said you have to liquidate the trust, and another lawyer said we can keep the properties. So, naturally I am confused.  My next question is that there are annuities in that trust, and I do not belive there are individuals named as beneficiaries. I believe the annuties say trust. Do you have to name an actual person as a beneficiary? I know there are death benefits on some of the annuities.   

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