Inheriting non-spousal IRA annuity

Submitted by Thomas Dineen on Fri, 2014-02-28 19:59

My parents have been discussing their estate planning with me and I had a few questions regarding the annuity in which they hold most of their assets. For better or worse, they elected to open an IRA annuity (a.k.a., “qualified annuity”) in 2001. It is an Individual Flexible Purchase Payment Deferred Variable Annuity from Nationwide.

Both of them turn 70½ this year and will need to begin taking required minimum distributions (RMDs). The “annuity commencement date” on the contract is January 12, 2014, my father’s 70th birthday.

First, am I correct in assuming that this commencement date is the annuitization date, and that it was likely chosen to coincide with the year in which they needed to start taking RMDs (that is, 2014)? I am not sure whether they decided to take distributions for life or for a period of years.

In short, can you explain briefly how annuitization works in light of RMDs?

Second, I understand the options when one inherits an IRA, but will my parents’ having started the annuitization process affect IRA inheritance, assuming they live for quite a while but still leave money in the IRA? I am their only child and the sole contingent beneficiary of the annuity policy.

My concern is that they have chosen the life payment annuitization option, and that this may supersede the rules regarding IRA inheritance; that is, I get nothing after both of them die if they chose the life option.

I somehow doubt this. I see that Alan-iracritic wrote on this site in August 2013 in response to a similar inquiry from Kelly Moncavage that “As long as you were named directly as beneficiary on the IRA annuity, you can take life expectancy RMDs whether your mother passed before or after her required beginning date.”

I’d be grateful for any observations you can provide. Many thanks!



Submitted by Alan - IRA critic on Fri, 2014-02-28 20:38

  • Your concerns are justified if they annuitize with a life or joint life and survivor annuity, as the payments will stop upon the death of the IRA owner or survivor. A period certain would provide continuing benefits if both passed prior to the period certain expiration. My comments you quoted only apply to a non annuitized IRA annuity.
  • With respect to RMDs, annuitization for life payouts become the RMD. There are IRS rules that prohibit a period certain that is in excess of their life expectancy. Annuitization for a much shorter period is OK, but those higher payments are considered to be the RMD and cannot be rolled over. In your case, even if the IRA was drained, there could still be funds left if the annuity distributions are not spent, and inheriting them would be less of a tax burden since the bulk of the taxes would have been paid at the time of the IRA distribution.


Submitted by Thomas Dineen on Fri, 2014-02-28 20:56

Many thanks.  So the term “annuity commencement date” is the same as “annuitization”?  Also, is there the option of changing from life or joint life to a period certain after one of my parents dies? 



Submitted by Thomas Dineen on Fri, 2014-02-28 22:17

Maybe I should have clarified that my father is the owner/annuitant, my mother the primary beneficiary, and I am the contingent beneficiary.  This is what Motley Fool had to say about contingent beneficiaries:”Though it’s not as common of an offering in an annuity, and not generally required even if the annuity does offer it, some annuities allow a secondary, or contingent, beneficiary along with the primary beneficiary. If the account has a contingent beneficiary, that person begins receiving payouts from the annuity upon the death of the primary beneficiary. Generally, the rules for the annuity payouts change by the time they reach a contingent beneficiary. The full amount of contributions still usually pay out, but the interest is forfeited to the company who controls the annuity.”



Submitted by Alan - IRA critic on Sat, 2014-03-01 00:34

Annuities come in several varieties, and to be sure you will have to determine exactly how this specific annuity is structured. If your father is the only annuitant, then it is not a joint and survivor annuity and payouts are based only on your father’s life expectancy and any period certain could not exceed his life expectany if the payouts were to meet the RMD requirements. That said, insurers know they must meet IRA RMD requirements so are very unlikely to mishandle the RMD issue. ” Annuity commencement date” typically means the same as annuitization, but that should also be verified. The Motley Fool quote sounds like it is addressing non qualified annuities without a specific RMD requirement. For an IRA annuity, the IRS Regs do not permit a contingent non spouse beneficiary to collect benefits much beyond the annuitants life expectancy, so if your father lives to his life expectancy, and your mother does not survive your father, there should be nothing left after your father’s death. If your mother does survive your father, since she is evidently not a joint annuitant but a beneficiary, the same is true for her. A period certain could be added, but it would basically protect against your father’s death prior to his life expectancy, not guarantee continued payments beyond his life expectancy. Again, these are complex products, so your parents may not understand how each possibility is handled. Perhaps you will be able to read the contract.



Submitted by Thomas Dineen on Sat, 2014-03-01 12:54

Thanks very much for all this.  I’m seeing my parents this weekend and will follow up with them.  At your convenience, can you explain how death benefits work with IRA annuities, given my scenario?  I appreciate your time. 



Submitted by Alan - IRA critic on Sat, 2014-03-01 15:42

I did above. Do you mean if annuity is NOT annuitized?



Submitted by Thomas Dineen on Tue, 2014-03-04 20:09

Turns out my mother is the Co-Annuitant.  Does this change anything?  Here are the names of the parties involved and the titles they are given on the Spousal Protection Annuity Option Request Form: The Contract Owner/Annuitant is my father; the Co-Annuitant/Primary Beneficary is my mother, and I am the Contingent Beneficiary.  Thanks again. 



Submitted by Alan - IRA critic on Wed, 2014-03-05 01:04

I don’t guarantee this analysis because insurance companies are constantly coming up with new products. But whatever the structure is, it must still comply with the IRS Regs for RMDs for annuities. These Regs are pretty complex and designed to prevent deferment of payouts so that beneficiaries inherit more. Here is my take on how the described annuity structure would play out. Once annuitization takes place in a joint and survivor annuity (payments until the last spouse passes), the only reason for a contingent beneficiary to exist would be if there was a period certain included in the event they both passed prior to their joint life expectancy. The period certain can not exceed their joint life expectancy under Table II of Pub 590. That expectancy is between 21 and 22 years. Having a maximum period certain of 22 years will require a certain reduction in the annual annuity payout, and as contingent beneficiary you would only receive payments after they both pass and your payment would be the same as theirs, but would not extend beyond 22 years in total. If one parent lived 22 years, you would get nothing. Note that the period certain could be less than 22 years, meaning that there would be a greater chance one of them would reach that year and there would be nothing left.



Submitted by Thomas Dineen on Wed, 2014-03-05 17:32

Many thanks.  I’ve asked my parents to pass on my questions to the person who sold them the annuity (by Nationwide) in 2001, and I appreciate your very good orientation about many of the issues concerned. 



Submitted by Thomas Dineen on Thu, 2014-03-06 20:26

Today my mother talked to the person who sold her and my father the annuity we’ve been discussing.  According to him, my position is secure as a beneficiary of the IRA annuity after both my parents have died, and that I will have access to whatever principal remains (not sure if this access is via lump sum or a more gradual distribution, or either).  This may have to do with the annuity having a “Beneficiary Protection Rider,” which I may not have made clear.  Can you explain briefly how such riders work?  Thanks very much again. 



Submitted by Thomas Dineen on Thu, 2014-03-06 20:55

Another aspect of my parents’ IRA annuity that may clarify things.  On the “Spousal Protection Annuity Option Request Form,” the following is stated: “Under this option, the contract can be either non-qualified or an IRA, the Contract Owner must be the Annuitant, the Contract Owner’s spouse must be Co-Annuitant and both must be sole primary Beneficiaries.” The roles/signatures are as follows:Contract Owner/Annuitant: FatherCo-Annuitant: Mother Beneficiaries (Primary Beneficiaries must be spouses): Primary: Father Primary: Mother Contingent: Myself So it seems that, when one parent dies, the surviving one automatically takes on the role of Contract Owner/Annuitant and I become the sole Beneficiary.Does this make sense to you?  Much appreciated!



Submitted by Alan - IRA critic on Thu, 2014-03-06 21:02

“Whatever Principal remains” could of course be nothing if your parents withdrew all of it. These various riders work in different ways and there are many products available. Do you know the name of the insurance company that will issue the IRA annuity?  And it is not totally clear whether the annuity will be annuitized or not.



Submitted by Thomas Dineen on Thu, 2014-03-06 21:29

Nationwide.  Below is a link that explains the rider.  https://ssc.nwservicecenter.com/media/pdf/product/VAM-0377AO.pdfHere is the most relevant paragraph: How Nationwide’s SPF works in an IRA. With an Individual Retirement Account, also known as an IRA, only one individual may be listed as thecontract owner. Most annuities are owner driven, which means that only the death of the contract owner will trigger a death benefit to his or her surviving spouse, the primary beneficiary.  What’s unique about annuities held within Nationwide IRAs is that they’re annuitant driven, which means that with SPF, a death benefit is provided upon the death of the annuitant or the co-annuitant on the contract. If either spouse passes away, the death benefit transfers to the surviving spouse, regardless of who owns the contract. It’s not limited to the death of just the contract owner like most IRAs outside of Nationwide. With SPF, the surviving spouse can continue the contract, and then can name a new beneficiary. If that surviving spouse then passes away, his or her new beneficiary will receive a death benefit or can continue the inherited contract at the death benefit amount.



Submitted by shelley kosrunek on Wed, 2014-05-14 21:34

Could you please clarify for me whether there can be co annuitants on an owner driven annuity contract which is a fixed single premium annuity that has been inherited.  I believe the answer is no, but I am not certain.  It seems clear that the single life table used for the calculation might mean that co annuitants would have a combined life expectancy which would be less than the required minimum in this scenario.



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