I want to know upon inheriting an annuity from my parent, do I owe taxes on the year it's inherited (on its growth) or only if I decide to cash it in? I'm assuming I can continue with the annuity in my name and not take any cash settlement.I want to know how this works.

Once it is distributed, either a lump sum distribution or a new annuity with you as the owner, ordinary income tax will become due on the "growth" of the annuity. The growth is the current value of the annuity less the amount paid in by the owner. Most all annuities, like traditional IRAs, are tax deferred. When they are inherited, you inherit all the tax liability that was deferred over the years by the owner of the annuity. Often, you can spread out the tax liability by annuitizing the annuity. Make sure the insurance company provides you a complete listing of all your distribution options with the tax implications of each one.

So once inherited, regarless of whether I decide to take a lump sum settlement, or reissue a new annuity in my name I will owe tax on the growth only not the entire amount, is that correct?

Yes, the growth since the original owner started the annuity, NOT the growth from the day you inherited it.

As long as I keep track of their original investment, I'll know the growth to pay tax on.

Don't worry about keeping track...the insurance company will have to give you a Form 1099-R for either the lump sum distribution or if you annuitize it, an annual Form 1099-R. They can provide all the tax information on the various distribution options you will have.

Do you sell annuities in New Jersey?

Ha Ha, no I work in a public library in California!

Figures, you're too honest to be an annuity salesperson! Bet nobody pulls the wool over your eyes!

Insightful commentary brings me to a question: I am the beneficiary of an annuity, the broker told me my only option is to become owner of that annuity. Is there a provision to distribute monies into the estate account without tax and/ or penalties until disbursed to inheritor? The fund is a pathetic performer, what are my options?

New Orleans Wrote:
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> Insightful commentary brings me to a question: I
> am the beneficiary of an annuity, the broker told
> me my only option is to become owner of that
> annuity.

You may have the option of declining the annuity. Is there an alternate beneficiary if you pass on it?

Is there a provision to distribute monies into the estate account without tax and/ or penalties until disbursed to inheritor?

Perhaps, if you are the only beneficiary and you decline the annuity. It may revert to the estate. You need to discuss this with an estate attorney if you are considering this. You may also be able to donate this to charity.

The fund is a pathetic performer, what are my options?

You can cash it out and pay the tax. Tax rates are pretty low these days. I assume this is a non-qualified annuity.

Thank you for your response, the main question since I have not seen the claims benefit form (in the mail), is there an option other than owning the account? The broker claims the ONLY option for me is to take ownership of this fund and I find that hard to believe. I am the sole beneficiary and this annuity fund has a fraction over 100k in it, it made a whopping 1.2% last year. If there are other options I don't know how to weigh the options to make an informed decision. Any advice given is greatly appreciated.

There are 2 threads here but in both cases we don't know if the annuity is a private purhase or from a retirement plan. Feel free to correct me if I am wrong. Dee Dee's statements in that regard seem to contradict themselves in that regard.

Not established so far is whether it is a private annuity, paid for with after-tax dollars, in which case it would get a step-up in basis at date of death, and at that point (or any time later) could be cashed in and only taxed on its growth from DOD.

On the other hand, if it is a pension annuity, I would presume it was purchased by an employer with before-tax dollars, and then the entire amount is taxable as ordinary income as it is withdrawn, and if liquidated the full amount would be taxable.

If your "only option" is to take ownership it is because you are the beneficiary and hence will own it. The broker, or insurer, can't give it to someone else if you are the beneficiary After you get title you can do anything you wish with it: liquidate, give to charity, allow to further grow, whatever.

In either case its value at DOD would be included in the Estate Value. If it is a pension annuity it will be fully taxed again as it is withdrawn.

ed

edcosoft wrote: "Not established so far is whether it is a private annuity, paid for with after-tax dollars, in which case it would get a step-up in basis at date of death, and at that point (or any time later) could be cashed in and only taxed on its growth from DOD."

Ed, there is no step-up in basis for annuities, non-qualified annuities that is. The beneficiary would not pay tax on the part of the payment that represents a return of the after-tax amount that was paid. This amount is the cost of the plan or investment. The growth in the annuity is fully taxable. The OP does not say whether the deceased owner had begun to receive periodic payments from the annuity or any loans/withdrawals. Those factors may change the basis.

Thankds, Dee Dee. I should have realized that since the growth hadn't been previously taxed. Also, I should have realized it was not a private annuitry by virtue of which board the post is on. Hope I didn't confuse the issue.

ed

An option you have as the owner is to transfer it to another annuity provider where you can choose better investments. Check out Vanguard and Fidelity who both offer good investment options and have low costs.

Per Sect. 72(s), if the annuity holder had not yet annuitized the account, and you are a non-spouse beneficiary, then you could either elect to begin distributions over your life expectancy (with the first payment coming out of the annuity not later than 12/31 of the year following death) or take out the full annuity balance not later than 5 years following the year of death (the '5-Year Rule'). These are the minimum withdrawal requirements, as you could withdraw amounts faster than this. However, elective (non-annuity) withdrawals will come out earnings first, whereas a life annuity will come out prorated between earnings and basis. I'm not sure if life expectancy withdrawals would be prorated, as this is really not a life annuity.

Depending on the basis in the annuity and therefore the tax liability a full withdrawal would create for you...... if not too bad, I'd consider getting the $$ out of the deferred annuity post-haste. You don't mention which insurer this is with, but most have a nasty habit of assessing hefty annual fees and charges that can be a real drag on annual earnings....as you seem to have found out for last year.

BruceM

I agree with BruceM. If you ask the annuity holder, it should provide a statement of the taxable basis and all your withdrawal/annuitization options and the tax implications of each option.

i am a non-spouse beneficiary of an untouched vanguard annuity. i was thinking of annuitizing and taking as little as possible out during my lifetime -to limit taxes and more importantly to pass it on to my children. my thinking is to (hopefully!) force my children to do the same - not take lump sum - only minimum payout. i realize that would ultimately be their choice... any thoughts/comments on this concept of passing the annuity i am inheriting on to my children by limiting my withdrawls?

thanks!

Most insurance companies will allow you to take an inherited annuity over a 5 year period, so that the tax burden can be 20% per year on the growth. I live in NJ as well and was informed of this. g Its'a good idea if you can keep track of the original investment made by whomeverleft you the inheritance as well.