Inheriting a Non-Qual Annuity

[padthaiforlunch]

Client is named beneficiary on non-qualified deferred annuity owned by grandparent.

Grandparent passes. Annuity value is $100,000. IRD is $50,000. The estate did not pay taxes on IRD.

Client must take one of three options:

Lump Sum
Five-year certain
Lifetime annuitization

Can the client 1035 the lump sum into a new annuity and avoid defer taxes on IRD?

 

[insuranceexec]

Client is named beneficiary on non-qualified deferred annuity owned by grandparent.

Grandparent passes. Annuity value is $100,000. IRD is $50,000. The estate did not pay taxes on IRD.

Client must take one of three options:

Lump Sum
Five-year certain
Lifetime annuitization

Can the client 1035 the lump sum into a new annuity and avoid defer taxes on IRD?

Great Question!

My immediate response was going to be NO; because in essence you are trying to "stretch" the proceeds and carry forward the cost-basis benefit from one generation to the next, which is only allowed with qualified money.

However in checking with several companies to verify what I am saying to be accurate; I have come up with this.

The only possible way to defer the tax on the current growth is if the current company is willing to apply the proceeds (in-house) to another annuity contract within their product offerings.(internal roll-over)

This may be good for your client, but bad for the agent; because seldom do these ever result in a commission

I hope this helps.............

 

[Charpress]

Good question and good answer.

In any 1035 exchange, the owner must be the same (actually, owner and annuitant) before and after. I don't think when it comes down to it that a particular insurance company, even if they allow in-house exchanges, is going to allow a 1035 exchange when the original owner is dead.

 

[arnguy]

Good question and good answer.

In any 1035 exchange, the owner must be the same (actually, owner and annuitant) before and after. I don't think when it comes down to it that a particular insurance company, even if they allow in-house exchanges, is going to allow a 1035 exchange when the original owner is dead.

I agree.

 

[GreenSky]

I have no idea but thought I'd respond anyway.

Rick

 

[SportsNut]

However in checking with several companies to verify what I am saying to be accurate; I have come up with this.

The only possible way to defer the tax on the current growth is if the current company is willing to apply the proceeds (in-house) to another annuity contract within their product offerings.(internal roll-over) .............

InsExec...

I would take that advice that these companies gave you above, regarding the internal rollover and avoiding taxation on the annuity, and put it in the ROUND FILE. That is where it belongs. Completely off the mark, IMO.

The answer to the original question is "NO", absolutely no way to avoid paying the taxes on what amounts to deferred accumulation in that annuity. This is the exact reason why annuities are the wrong product in most cases... or at least where accumulation is the selected mode w/o the intention of annuitizing down the road. The Beneficiary always gets nailed with the taxes at the Ben's tax rate, usually higher than the rate of the Decedent, especially when the annuity has a large accumulation involved. This can easily push the receipient into the next bracket or two, depending on the size of the annuity and deferred int.

NO shot at you InsExec, just callin-em like I see-em... No annuity expert here, but more than a casual study of tax law. Here is what the IRS has to say on the subject.

 

[insuranceexec]

InsExec...

I would take that advice that these companies gave you above, regarding the internal rollover and avoiding taxation on the annuity, and put it in the ROUND FILE. That is where it belongs. Completely off the mark, IMO.

The answer to the original question is "NO", absolutely no way to avoid paying the taxes on what amounts to deferred accumulation in that annuity. This is the exact reason why annuities are the wrong product in most cases... or at least where accumulation is the selected mode w/o the intention of annuitizing down the road. The Beneficiary always gets nailed with the taxes at the Ben's tax rate, usually higher than the rate of the Decedent, especially when the annuity has a large accumulation involved. This can easily push the receipient into the next bracket or two, depending on the size of the annuity and deferred int.

NO shot at you InsExec, just callin-em like I see-em... No annuity expert here, but more than a casual study of tax law. Here is what the IRS has to say on the subject.

No harm no foul JT. Of the companies I spoke with, only one(Allianz) told me that they would allow another contract as part of the settlement offer.

I spoke to 3 different companies:

RBC
American Equity
Allianz

Still a great question............LOL

 

[padthaiforlunch]

Hey Nut, thanks for the link. I searched but could not find this.

Too bad more companies don't provide for a life policy to pay out premium and accumulation, so it could pass tax-free. Guess there is a reason to use Allianz.

fyi. If estate pays taxes on IRD, then beneficiary can take direct deduction on their personal return, but only in same year. Compelling reason to take lump sum.

The beneficiary can possibly avoid a higher tax bracket by annuitizing.

 

[SportsNut]

Hey Nut, thanks for the link. I searched but could not find this.

Too bad more companies don't provide for a life policy to pay out premium and accumulation, so it could pass tax-free. Guess there is a reason to use Allianz.

fyi. If estate pays taxes on IRD, then beneficiary can take direct deduction on their personal return, but only in same year. Compelling reason to take lump sum.

The beneficiary can possibly avoid a higher tax bracket by annuitizing.

What is the reason to use Allianz again...? That they will tell you that they will do a rollover into a new contract (and avoid taxation to the B). Clearly outside what is permissible by IRS. So my conclusion here is, any company that advises that this is possible is doing so out of ignorance of the law, or worse. Unless there is something that I am missing about their guidance here... if so, let me know. The provision to rollover into any other product and continue to defer the tax simply doesn't exist for a new contract holder. Besides, it is not the Annuity Cos responsiblity to pay the tax, but it is theirs to report the distribution on a 1099. Are they saying they will forego the 1099 filings...? This is the only way to avoid a tax issue, IF YOU DON"T GET CAUGHT. Dangerous.

I read and understand the part about the estate paying the tax, but wouldn't this only occur if the Estate is also the B...? One of the major selling points of the annuity is tax dererral and by-passing probate... So if it does the ladder then how does the Estate pay tax on a distribution that is made to another party...?

No expert on the annuity subject, having enough knowledge to declare myself dangerous on the issue... but not a big fan of accumulation w/o the clear timeline to annuitize, as it leads to future tax issues 100% of the time, IMO.

 

[insuranceexec]

Hey Nut, thanks for the link. I searched but could not find this.

Too bad more companies don't provide for a life policy to pay out premium and accumulation, so it could pass tax-free. Guess there is a reason to use Allianz.

fyi. If estate pays taxes on IRD, then beneficiary can take direct deduction on their personal return, but only in same year. Compelling reason to take lump sum.

The beneficiary can possibly avoid a higher tax bracket by annuitizing.

I completely agree with both you and with what Sportsnut is saying.

I think that a company should use a life policy on the accumulation side to pay to the bene; so that the proceeds do pass tax-free.

I have sat on several review board meetings with annuity companies to design new products, and have brought this up a number of times. The problem with this technique is the underwriting on the Insurance side. When I explained that they could issue a SPWL with a ratio of 1.2 to 1 (Meaning almost guaranteed issue) I got their attention.

Another problem is; what would happen if they, the client, wished to surrender the contract early? There would be substantially less due to the purchase and ongoing cost of the SPWL.

Great question; but I am also open to some new suggestions as I have another advisory meeting next week.

In speaking with Allianz again this morning. They informed me that they would allow for the bene to CONTINUE the existing contract..........Completely contradictory!

They would not allow for an internal roll-over to another type of policy. So I have spoken to 2 different people at Allianz and have received a different answer........LOL

I think I am starting to like my initial gut reaction in the beginning and the round file analogy that Sportsnut gave...............LOL