Inherited annuity

[Allen Trent]

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

Correct. When you execute a Disclaimer whether as part of a will/trust process or as a beneficiary of a life policy, annuity, retirement account, you have no say in where it goes. When you disclaim, you are saying "proceed as if I pre-deceased the deceased person". The will, trust or life, annuity,retirement custodian then proceeds to follow through as spelled out in the directing documents. It is imperative to have per stirpes involved as a bene designation in wills,trusts or life,annuity & retirement accts if you want to see it go to your kids, etc.

I believe it may even be more common going forward if people are aware. How many high income & large asset clients 50-65 want to receive a large retirement acct or NQ annuity in a high tax bracket.

I have seen spouses who are 75-90 use disclaimers when their spouse dies to get assets out of their name that would have likely been eaten up by LTC costs.

Almost a way to do some generation skipping planning. Best to have a lawyer help execute a disclaimer

 

[LostDollar]

The point of my post was that the blog post gives no indication that there is another question that could be asked. Or after carefully rereading your comments and the blog post, I guess the suggestion is there, but I find it to be very, very veiled for someone that doesn't have a lot of specific knowledge to start with.If the stirpes vs capita information had been available to me then as a search and question clue, I could have considered an option I did not know was available until I just read your post this morning.

 

[Allen Trent]

The point of my post was that the blog post gives no indication that there is another question that could be asked. Or after carefully rereading your comments and the blog post, I guess the suggestion is there, but I find it to be very, very veiled for someone that doesn't have a lot of specific knowledge to start with.If the stirpes vs capita information had been available to me then as a search and question clue, I could have considered an option I did not know was available until I just read your post this morning.

Yup. And rarely known by agents or brokers to inform clients they have that option. Same for receiving assets via a will or trust. Keep in mind, it is very, very rare to be utilized as a strategy. Likely because most people need or want the money being received, or dont know about disclaimer or it happens so fast that they believe they have to make an immediate decision

 

[Tahoe Ray]

Yup. And rarely known by agents or brokers to inform clients they have that option.

Or they know and would rather continue collecting fees on a stretch rather than having the asset go to someone with whom they don't have a relationship.

 

[Allen Trent]

Or they know and would rather continue collecting fees on a stretch rather than having the asset go to someone with whom they don't have a relationship.

But wait, those collecting fees couldn't possibly do that according to the ads I have read as they are fiduciaries and must always act in your best interest.....unlike those leaches that earn commissions

 

[CALTCAgent]

This is probably a little off subject but I have heard there is a little-known quirk in the tax law that could possibly save significant income taxes for individuals who inherit an annuity purchased prior to October 21, 1979

If an annuity purchased prior to October 21, 1979, has not reached its maturity date or has not paid out any annuity payments prior to the account holder’s death, the heirs normally can cash in the annuity without owing any income tax. They receive a step up in basis.

I am not certain but I am working on this in an annuity I inherited.

 

[Allen Trent]

This is probably a little off subject but I have heard there is a little-known quirk in the tax law that could possibly save significant income taxes for individuals who inherit an annuity purchased prior to October 21, 1979

If an annuity purchased prior to October 21, 1979, has not reached its maturity date or has not paid out any annuity payments prior to the account holder’s death, the heirs normally can cash in the annuity without owing any income tax. They receive a step up in basis.

I am not certain but I am working on this in an annuity I inherited.

I believe that special rule related to step up in basis if issued before 1979 is related to variable annuities only. It is extremely rare for many of those to still be active for several reasons. 1- 40 years ago, the purchaser would have to be very young to have it still be active. 2- variable annuities were pretty uncommon in 1970s are earlier. 3- most people have had agents swoop in to move them from 1 annuity to a new one several times in 4 decades as a commission needs analysis play, so very hard to find one active from pre 1979

For your sake, I hope you can in deed utilize that exception

 

[CALTCAgent]

I believe that special rule related to step up in basis if issued before 1979 is related to variable annuities only.

For your sake, I hope you can in deed utilize that exception

Great response!

I am trying to determine if it is a variable annuity or fixed. It pays fixed interest that changes annually but the principal is not guaranteed. However the principal does not go down, at least from I have seen. The company only calls it a group annuity. Somehow I feel I should know the answer after all these years in business.

 

[Allen Trent]

Great response!

I am trying to determine if it is a variable annuity or fixed. It pays fixed interest that changes annually but the principal is not guaranteed. However the principal does not go down, at least from I have seen. The company only calls it a group annuity. Somehow I feel I should know the answer after all these years in business.

You and me both. But those old ones are very confusing & different. Reminds me a bit of old life policies that were endowments, etc that were hard to keep track in my mind.

Here are a couple of IRS documents on this topic of rev ruling 70-143. Maybe a CPA can pull the archive of Rev ruling 143.

At a minimum, I would personally be aggressive & file with a step up in basis knowing you may have to get audited & pay the real tax, etc. But, that is just me & it could make you worse off. The risk of doing lump sum for step up in basis is if it gets later reversed you would have missed out on using one of the other claim settlement options that could have spread out the tax such as payout annuity or 5 yr deferral. Also ask the carrier if they offer in inherited RMD settlement option if the death was before 12/31/2019. Most carriers don't on NQ annuity but a handful do.

https://www.irs.gov/pub/irs-wd/0311030.pdf

here is another: https://www.irs.gov/pub/irs-wd/0439016.pdf

 

[CALTCAgent]

At a minimum, I would personally be aggressive & file with a step up in basis knowing you may have to get audited & pay the real tax, etc. But, that is just me & it could make you worse off. The risk of doing lump sum for step up in basis is if it gets later reversed you would have missed out on using one of the other claim settlement options that could have spread out the tax such as payout annuity or 5 yr deferral. Also ask the carrier if they offer in inherited RMD settlement option if the death was before 12/31/2019. Most carriers don't on NQ annuity but a handful do.

https://www.irs.gov/pub/irs-wd/0311030.pdf

here is another: https://www.irs.gov/pub/irs-wd/0439016.pdf

Great advise again. That is what I was thinking of doing but not really sure if I should.

The carrier allows 1 withdrawal a year. So I was thinking of taking a small amount and claim the step up in basis. Then see if I get audited and it gets reversed. I wonder if things like this get flagged right away or could take a few years.

Taking out the lump sum would be a huge tax bill if I am wrong and missed out on spreading out the tax liability. The options were lump sum, retirement annuity or put the account in my name.