Annuities have become an extremely popular tool in people's retirement plans. Like any other asset, these contracts can be the subject of an inheritance.
If they are inherited then the beneficiary needs to know what the options are for handling the annuity and what the tax consequences are. First, if a spouse inherits the annuity, then he or she can almost always continue the annuity contract as it is and thus face no immediate tax issues.
As the Motley Fool discussed in an article entitled "Tax Rules for an Inherited Non-Qualified Annuity," non-spouse heirs typically have three options, including:
- Take a Lump Sum – If an heir chooses a one-time payment, then the heir will need to pay income tax on any appreciated amount over the original premium payments the deceased made.
- Arrange for Smaller Payments Over Time – By accepting smaller period payments, the heir can avoid a large one-time income tax payment. However, income tax will still be owed on any appreciation of the annuity.
- Switch to a Different Annuity – The person who purchases an annuity can switch to a different provider without paying income tax. However, it is unclear if someone who inherits the annuity can do the same. In a private letter ruling the IRS allowed one heir to do so, but many annuity providers do not wish to rely on the ruling as it technically only applies to the person who asked for it. Some providers will work with heirs on switching providers though.
If you inherit a non-qualified annuity and have questions about what to do with it, talk to a Cincinnati estate attorney about these options and which is the best choice for you.
Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.
For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).
Reference: Motley Fool (Dec. 19, 2015) "Tax Rules for an Inherited Non-Qualified Annuity"