Inherited annuity

[capnjim01]

I have a client that is the beneficiary of her deceased mothers annuity. It is non qualified money. She is wanting to take out her own annuity with the proceeds but the company says if she rolls it into a new contract she will have to pay RMD the first year. It's about $208,000 give or take and the new annuitant is 6 years old.

Does anyone a an idea of what the RMD would be and what is the best way to avoid paying taxes on the proceeds now?

 

[Tahoe Ray]

I have a client that is the beneficiary of her deceased mothers annuity. It is non qualified money. She is wanting to take out her own annuity with the proceeds but the company says if she rolls it into a new contract she will have to pay RMD the first year. It's about $208,000 give or take and the new annuitant is 6 years old.

Does anyone a an idea of what the RMD would be and what is the best way to avoid paying taxes on the proceeds now?

There are only a few distribution options when a non-spouse inherits an annuity. The "RMD version" is called a 72q or a non-qualified stretch.

You can google around with those terms to get some more info but that (outside of annuitizing) should be the most tax-efficient option. You can't avoid paying the taxes on an inherited annuity if you're a non-spouse. The NQ stretch just lets you spread that tax liability out over a very long time frame.

Keep in mind that not all carriers accept this structure (for instance, Athene doesn't) and those who do may have limited product selection (like Global Atlantic only allows NQ stretches on their Choice Accum II product).

I hope that helps.

 

[Allen Trent]

I have a client that is the beneficiary of her deceased mothers annuity. It is non qualified money. She is wanting to take out her own annuity with the proceeds but the company says if she rolls it into a new contract she will have to pay RMD the first year. It's about $208,000 give or take and the new annuitant is 6 years old.

Does anyone a an idea of what the RMD would be and what is the best way to avoid paying taxes on the proceeds now?

Actually, I am a beneficiary of my mothers NQ VA with Lincoln. Because I am already doing well with my own pension, 401k, other investments I don't want to receive these funds & pay taxes as a lump sum or even over the 5 year deferral. Because of my age & tax rate, I also don't want the RMD income that I will owe 30-35% in taxes. So, I am disclaiming my share & because the beneficiary listing is per stirpes, my 4 children will become the beneficiaries of my share. ages 21,19, 16 & 13. Because the IRS tables for non spouse beneficiary RMDs use a life expectancy of age 83, their RMD life expectancy factors will be 62, 64,67 & 70. So, they will have to take very, very little out & they are all in 0-10% tax bracket.

you mention age 6, the carrier will likely want proof via an affidavit or a probate court document showing guardian/conservatorship for the 6 year old who cannot legally execute contract documents or make beneficiary selections. 6 year old RMD will likely be based on a factor of 76.8, meaning about 1.3% of the account value needing an RMD by the end of the year following the death. but I am guessing they will be 7 years old if RMD not needed until 12/2020, so 75.8 factor. (Acct value 12/31/19 divided by 75.8). probably $130 RMD for every 10k in account value for the 1st year

NOTE-- unlike Qualified RMD tables for account owners that gradually change, I believe beneficiary RMD tables decrease by 1 every year so the RMD ratios escalate much quicker than RMD's do for the owner of an IRA taking their own RMDs

not sure this helps, but thought I would pass along as I am in the middle of this topic myself.

 

[Tahoe Ray]

View attachment 5807

Actually, I am a beneficiary of my mothers NQ VA with Lincoln. Because I am already doing well with my own pension, 401k, other investments I don't want to receive these funds & pay taxes as a lump sum or even over the 5 year deferral. Because of my age & tax rate, I also don't want the RMD income that I will owe 30-35% in taxes. So, I am disclaiming my share & because the beneficiary listing is per stirpes, my 4 children will become the beneficiaries of my share. ages 21,19, 16 & 13. Because the IRS tables for non spouse beneficiary RMDs use a life expectancy of age 83, their RMD life expectancy factors will be 62, 64,67 & 70. So, they will have to take very, very little out & they are all in 0-10% tax bracket.

you mention age 6, the carrier will likely want proof via an affidavit or a probate court document showing guardian/conservatorship for the 6 year old who cannot legally execute contract documents or make beneficiary selections. 6 year old RMD will likely be based on a factor of 76.8, meaning about 1.3% of the account value needing an RMD by the end of the year following the death. but I am guessing they will be 7 years old if RMD not needed until 12/2020, so 75.8 factor. (Acct value 12/31/19 divided by 75.8). probably $130 RMD for every 10k in account value for the 1st year

NOTE-- unlike Qualified RMD tables for account owners that gradually change, I believe beneficiary RMD tables decrease by 1 every year so the RMD ratios escalate much quicker than RMD's do for the owner of an IRA taking their own RMDs

not sure this helps, but thought I would pass along as I am in the middle of this topic myself.

Great additional info, Allen. Disclaiming can be a great strategy here.

 

[Allen Trent]

Great additional info, Allen. Disclaiming can be a great strategy here.

agree, surprised it isn't used more often on IRAs & NQ annuity. Considering most owners die between 75-90, their kids are usually 55-70. I see a lot of them receive the funds as a lump sum on NQ annuity & maybe stretch on the IRA money. Big tax bill comes next year & many of them didn't need any or at least all of the money. many carriers & investment companies even permit a partial disclaimer. IE: Accept 40% of account & disclaim the balance.

This only works if the bene designations were properly done as per stirpes. if per capita, the other primary beneficiaries would receive the disclaimed amounts---generally the adult siblings.

 

[capnjim01]

View attachment 5807

Actually, I am a beneficiary of my mothers NQ VA with Lincoln. Because I am already doing well with my own pension, 401k, other investments I don't want to receive these funds & pay taxes as a lump sum or even over the 5 year deferral. Because of my age & tax rate, I also don't want the RMD income that I will owe 30-35% in taxes. So, I am disclaiming my share & because the beneficiary listing is per stirpes, my 4 children will become the beneficiaries of my share. ages 21,19, 16 & 13. Because the IRS tables for non spouse beneficiary RMDs use a life expectancy of age 83, their RMD life expectancy factors will be 62, 64,67 & 70. So, they will have to take very, very little out & they are all in 0-10% tax bracket.

you mention age 6, the carrier will likely want proof via an affidavit or a probate court document showing guardian/conservatorship for the 6 year old who cannot legally execute contract documents or make beneficiary selections. 6 year old RMD will likely be based on a factor of 76.8, meaning about 1.3% of the account value needing an RMD by the end of the year following the death. but I am guessing they will be 7 years old if RMD not needed until 12/2020, so 75.8 factor. (Acct value 12/31/19 divided by 75.8). probably $130 RMD for every 10k in account value for the 1st year

View attachment 5807

Actually, I am a beneficiary of my mothers NQ VA with Lincoln. Because I am already doing well with my own pension, 401k, other investments I don't want to receive these funds & pay taxes as a lump sum or even over the 5 year deferral. Because of my age & tax rate, I also don't want the RMD income that I will owe 30-35% in taxes. So, I am disclaiming my share & because the beneficiary listing is per stirpes, my 4 children will become the beneficiaries of my share. ages 21,19, 16 & 13. Because the IRS tables for non spouse beneficiary RMDs use a life expectancy of age 83, their RMD life expectancy factors will be 62, 64,67 & 70. So, they will have to take very, very little out & they are all in 0-10% tax bracket.

you mention age 6, the carrier will likely want proof via an affidavit or a probate court document showing guardian/conservatorship for the 6 year old who cannot legally execute contract documents or make beneficiary selections. 6 year old RMD will likely be based on a factor of 76.8, meaning about 1.3% of the account value needing an RMD by the end of the year following the death. but I am guessing they will be 7 years old if RMD not needed until 12/2020, so 75.8 factor. (Acct value 12/31/19 divided by 75.8). probably $130 RMD for every 10k in account value for the 1st year

NOTE-- unlike Qualified RMD tables for account owners that gradually change, I believe beneficiary RMD tables decrease by 1 every year so the RMD ratios escalate much quicker than RMD's do for the owner of an IRA taking their own RMDs

not sure this helps, but thought I would pass along as I am in the middle of this topic myself.

NOTE-- unlike Qualified RMD tables for account owners that gradually change, I believe beneficiary RMD tables decrease by 1 every year so the RMD ratios escalate much quicker than RMD's do for the owner of an IRA taking their own RMDs

not sure this helps, but thought I would pass along as I am in the middle of this topic myself.

 

[capnjim01]

My bad it's been a long day bene, is 60 not 6

 

[Allen Trent]

My bad it's been a long day bene, is 60 not 6

Ha. We all have been there.

Looks like factor will be 25, so about 4% will need to be taken if RMD.

Now, keep in mind, when you go the inherited RMD route on a NQ annuity, all the historical deferred gains have to come out 1st as taxable before you can access any of the cost basis tax free.

So, if you are trying to have a more tax efficient distribution, you might want to get payout annuity rates. Many old annuities have outdated higher interest and shorter mortality tables in their old contracts. Those can benefit a beneficiary who chooses payout annuity as the death claim option. If a payout is chose, the taxable gain & cost basis will be spread over the length of the payout. This means the IRS exclusion ratio would benefit the person by only having a portion of each check received be taxable and the rest tax free under the exclusion ratio. The carrier should be able to give the payout options and the exclusion ratio for each option.

 

[LostDollar]

agree, surprised it isn't used more often on IRAs & NQ annuity. Considering most owners die between 75-90, their kids are usually 55-70. I see a lot of them receive the funds as a lump sum on NQ annuity & maybe stretch on the IRA money. Big tax bill comes next year & many of them didn't need any or at least all of the money. many carriers & investment companies even permit a partial disclaimer. IE: Accept 40% of account & disclaim the balance.

This only works if the bene designations were properly done as per stirpes. if per capita, the other primary beneficiaries would receive the disclaimed amounts---generally the adult siblings.

With new tax laws, this may be less useful now than it was before 2020, but I appreciate seeing the information because it adds to my education on the topic.

When I searched for something like "disclaiming an IRA" last year, one of the leading results I came up with was this (item 2):
Can Primary Beneficiaries Disclaim and Dictate Where the Inherited IRA Funds Go? | Ed Slott and Company, LLC

At the time I was under tremendous pressure for "fast action" and that, combined with the reputation which I have seen forum members like dhk attribute to Ed Slott, caused me to think there was no benefit to further evaluation of that possibility.

I see now there may have been another option available for consideration (although I am confident the executor of the estate would NOT have appreciated my dumping that issue in the mix).

At any rate, as I said, I appreciate seeing your comments and hope they will benefit someone else in the future.

 

[Tahoe Ray]

If you really want to learn about IRAs, go to Ed Slott's bootcamp. I went several years ago and walked out with a ton of information.