Not to be morbid, but this current virus scare that’s gripping the country has triggered a ton of calls and questions about inheriting annuities. Both annuity owners and the policy beneficiaries want to know what happens and what are the available options. So let’s take a closer look at what choices you have with an inherited annuity.
First of all, you need to know that life insurance companies issue annuities, regardless of the type of annuity contract. Fixed annuities are regulated at the state level, and variable annuities (classified as a security) are regulated by FINRA and the SEC.
Annuities can be held in an IRA structure (i.e. qualified annuity) or a non-IRA structure (i.e. nonqualified annuity). For example, a qualified annuity was funded with pre-tax dollars and has grown tax-deferred, so any withdrawals are subject to ordinary income taxes.
If the owner of an annuity dies, and you are listed on the policy as the beneficiary (or one of the beneficiaries)...you will be inheriting that annuity. At that time, you will then start working with the issuing carrier and their customer service team to carry out your specific requests.
Before I start diving into some specific details of what choices you have when you inherit an annuity, the first thing you need to do is set an appointment with a qualified tax professional, tax lawyer, or CPA. Do not take final tax advice from an advisor or an agent that has no tax qualifications, and then base your decision on what they say when it comes to an inherited annuity.
Anytime our friends at the Internal Revenue Service (IRS) are involved, you need to make sure you are making a fully informed decision. Tax rules, tax implications, tax liability, and if you need to pay taxes on the inherited annuity will all come into play. Estate taxes may come into play as well.
The taxes you may owe are dependent upon the distribution option you choose. This is why you need to see a true tax professional before pulling the trigger.
If you inherited an annuity as a listed beneficiary on the policy, you have a few distribution options. Below are the primary choices that you have.
You can transfer the inherited annuity to another annuity if it is more beneficial for your specific situation. For example, reinvesting an inherited annuity into another annuity type might make sense if your goal is income and the annuity you inherited didn’t have higher contractual guarantees than other carriers you shopped. Even if you transfer your inherited annuity into a new annuity, you still must choose one of the distribution methods above.
Surviving spouses can establish themselves as the new owner of the policy. If the inherited contract was a “Joint and Survivor Annuity” that was in payout mode, the income stream will continue uninterrupted and unchanged for that surviving spouse’s life.
If you happen to inherit an annuity, you need to treat that “found” money like another other investment and figure out where it fits in your portfolio and overall financial and estate plan...or other personal finance type goals. Below are some frequently asked questions I receive concerning inherited annuities.
Whether you inherit an annuity or are thinking about purchasing one, there are only 2 questions that you need to answer to determine if you need to keep that annuity or transfer to another one.
From those 2 answers, you can then match those goals with the annuity type that would provide the highest contractual guarantee. If you need income, then you probably need to either maximize the inherited contract or transfer to the highest contractual payout available. If you need pure market growth or have other investment opportunities, then you probably need to cash out or take the 5-year payout to lessen the tax blow...and go manage the money.
It’s very important to listen to your gut feel and instincts when making your final decision. Don’t be influenced by an agent or advisor’s sales pitch, and make that decision on your terms and on your time frame.