Gene E. Utterback, EA
Guest
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 Posted:
Fri Nov 12, 2004 11:00 am Post subject:
Re: inherited annuity |
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"Leah Skylar" <leahskylar@webtv.net> wrote:
| Quote: | Hello..my uncle, who is 85 and in very poor health, recently
told me that I am the beneficiary of his variable
annuity..he has never touched the interest or principle..it
was an initial investment of 80K..which went as high as 135K
and is currently at approx 110K..with tax deferred earnings
of 32K..in something called the Polaris Fund. I am 52 and
wonder what tax consequences there will be when I inherit
this fund..if I should be planning ahead..BTW..I am in the
15% tax bracket..take the standard deduction..no investments
of my own except a small IRA (20k)..and really don't want an
annuity..can I convert this to a regular stock/mutal
fund..roll it over..or will it have to remain an annuity
until I am 59..or if I try to cash it in..will I be killed
in taxes..thanks for any help..the nephew
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You haven't (and likely can't) post enough information for
us to give you the "right" answer. There are a myriad of
factors that you need to consider. With that caveat, here
is the short answer:
You need to talk to the person who sold your uncle the
annuity. Be advised that you will likely need your uncle's
permission to do this and it wouldn't hurt for you AND your
uncle to meet with this person (or whomever has replaced the
initial sales person).
Some annuities provide for a increased death benefit which
could make some of the proceeds tax free. Some annuities
base the payout at death on the highest watermark reached by
the annuity, some add a kicker on top of that based on a
percentage of earnings, some return the original principal
if the contract value is less than the premium payments -
and there are other options depending on what riders were
elected when purchased and the value of the contract on your
uncle's death. There is NO WAY to know what will happen
without reading the contract, and the sad truth is that most
investors don't really understand (or remember) all of their
contract provisions.
Your not wanting an annuity is pretty much irrelevant. What
is relevant is whether the annuity was funded with qualified
or nonqualified money - this will be a big factor in what
your options are once you inherit. If the annuity was
funded with qualified money it will get treated the same as
if you had inherited an IRA that had mutual fund holdings -
you will need to pay tax on the money you get and you will
have some options about how fast you must take the money.
Since you say your uncle has not touched any of the money it
seems safe to assume he has NOT started taking
distributions. If this is the case, when you inherit
qualified money your options include taking the money out
all at once, over 5 years, or over YOUR remaining life using
the life expectancy tables. All these options get around
the premature distribution penalty. The last option will
spread the money out the longest and will help keep you in
the 15% bracket. The first option will push you into a
higher tax bracket right away.
If the annuity was funded with non-qualified money then you
and your uncle have an opportunity to engage in some tax
planning that could save both of you quite a bit of money.
Depending on your uncle's tax bracket, he could gift the
annuity to you, pay tax on the earnings ONLY and you'd get
the annuity with a stepped up basis, you'd own the annuity
with a basis of $110 so that when you sold out of it for
$110K you'd have no gain to pay tax on. Your uncle will have
to pay tax on the $30K but that could be in a much lower
bracket that estate tax, if the annuity were subjected to
estate taxes - again, we don't have enough information.
The best advice I can give you is to talk to an Independent
Financial Advisor or tax professional who understand
annuities about the annuity contract and get as much
feedback as you can. Expect to pay for this consultation,
but sleep well in the knowledge that the cost of the advice
will be much less than the tax someone is likely to pay by
accident.
If you don't mind - I am wondering why you really don't want
an annuity? Annuities are one of the safest investments
available, because they are issued by insurance companies,
your money is kept separate from the operating money of the
company, and many of today's annuities allow you to
participate in the upswings of the market while limiting
your downside losses.
Let me ask you this question - if I told you there was an
investment that guaranteed you a return of no less than 7%
for providing you a guaranteed income for the rest of your
life and at the same time allowed you to stay invested
aggressively in the stock market so that if your contract
value spiked you could use the highest watermark as a base
for getting a guaranteed income for the rest of your life
and at the same time guaranteed you that should you decide
to get out while your investment was at an all time high
that you would only pay tax on the gains and at the same
time guaranteed that when you die your beneficiaries are
guaranteed to get at least all of the money you put in back
(adjusted for anything you've taken out yourself of course),
and the most likely your beneficiaries could take a check
for the highest watermark the investment ever reached -
would you be interested?
What if I told you that a $110,000 investment for a 45-year
old retiring at age 60 could guarantee you a monthly income
of $1,710 for the rest of your life with a 20-year minimum
guarantee (so that you can pass some on to your heirs)?
This would be a minimum return of $410K.
Same $110K same 45 year old retiring at 60, participating
aggressively in the stock market - difference is you could
get as much as $5,500 per month with a 20 year minimum
guarantee - this would be a return of $1,320,000 - would you
be interested in that?
I'm just trying to understand why you don't like annuities.
Thanks,
Gene E. Utterback, EA
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