taxation of inherited variable annuity

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  • #77526
    Themistocles
    Participant

    My friend is the owner of a variable annuity with Transamerica.  She intends to convert some or all of it to an income annuity paying out to her brother as the annuitant.  This annuity has a large capital gain.  She is in a high tax bracket while her brother is in a low tax bracket.

    1.  Is it the case that she will be liable for income taxes on the monthly payouts that her brother will be receiving?

    2.  Is there a way for her brother to become liable for the income taxes on the payouts?  I understand that if she were simply to give the variable annuity in its entirely to her brother she would be liable for income taxes on all the gains in the year in which she makes such a gift.  Is that correct?

    3.  Assuming that she remains the owner of the variable annuity and that she predeceases her brother, does he inherit the variable annuity automatically as the surviving annuitant or is the inheritance of the variable annuity determined by her will?  Does the inheritor of the variable annuity enjoy a stepped-up basis?  Does the income annuity terminate on the death of the owner or only on the death of the annuitant?

    Thanks for any advice.

    #77528
    Kaye Thomas
    Moderator

    Though I don’t know for sure, I expect converting some or all of the annuity to one with a different annuitant would be a taxable exchange. I would be surprised to learn there’s a way for your friend to shift the tax on the annuity’s gain to her brother. This is not a strong area for me, so the only firm advice I can give is to consult a knowledgeable professional before proceeding.

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