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Elderly relative passes away. They leave an annuity which is in pay status to their child, by way of a designated beneficiary. It is unclear whether the annuity was funded by before or after tax dollars, but is not held by any sort of tax advantaged/retirement account.
The company handling the distribution is offering the beneficiary to continue to annuity payments OR give them a lump sum. Pretty traditional.
The tricky part is that the distribution company is saying that the cost basis is not adjusted to be current, but is the cost basis of the original owner.
So, using the lump sum example, the plan will pay $50,000 in a lump sum, with a cost basis of $30,000. Taking the annuity payment results in a similar liability, just extended over time with the first few months of payments being "tax free" according to the plan.
Why or why not is the basis not adjusted such that the beneficiary has no tax liability? Seems odd to me.
The accountant involved says if they issue a 1099R, which the plan says they will do, then the beneficiary assumes the original owner's cost basis.
Generally familiar....not quite there age wise....not sure i know about "RMD Change Factors". What are they, and will my (pretty "sophisticated") accountant be aware of such?
Location: Was Midvalley Oregon; Now Eastside Seattle area
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In RMDs, the amount of withdrawal is determined by the expected mortality factor of that person. Ever year, the factor is changes because every survival year changes your mortality.
For annuities, there is something similiar.
Once the annuity is annuitized (withdrawals begin) the annuity income; the Income is part original basis and part 'expected' gains based on expected mortality age and the expected returns of the underlying investments.
Apparently the annuitant specified a 'period certain' income (annuity company guarantees that a certain amount of monies which is part basis and part investment earnings) which guarantees the annuity $pile is fully distributed by a certain time period. IF the annuitant dies before the end of 'period certain', thus the leaving undistributed income, any remaining undistributed income is then distributed to designated heir, in lump sum, by the date of the specified period certain, or a method determined by heir. There are many variations, possibly an infinite variations.
Annuities can get really complicated especially in hybrid annuities (which my wife and I have).
IRA's with its RMD is a familiar variation for those who have excess tax deferred funds in retirement.
For those who use taxable funds (non tax advantaged) in retirement, the "4% Rule-Theory, is popular.
If you are near or in retirement, my recommendation is that you consult a very good retirement specialist. Many of us retirees have discovered that withdrawing retirement funds is a whole lot more complicated than investing.
The annuity company is correct, as disclosed earlier post.
TMI,
Consult your tax advisor BEFORE you determine what distribution you wish to take.
YMMV
Location: Was Midvalley Oregon; Now Eastside Seattle area
13,073 posts, read 7,515,583 times
Reputation: 9798
Quote:
Originally Posted by Ted Bear
The facts as i know them to be:
Elderly relative passes away. They leave an annuity which is in pay status to their child, by way of a designated beneficiary. It is unclear whether the annuity was funded by before or after tax dollars, but is not held by any sort of tax advantaged/retirement account.
Annuities in themselves are a tax advantage plan. They Can be used for retirement-we have an annuity to fund future college of yet undetermined grandchild(ren)
The company handling the distribution is offering the beneficiary to continue to annuity payments OR give them a lump sum. Pretty traditional.
The tricky part is that the distribution company is saying that the cost basis is not adjusted to be current, but is the cost basis of the original owner.
The annuity distributions was based on annuitant's factors. Contract between annuitant and annuity company.
So, using the lump sum example, the plan will pay $50,000 in a lump sum, with a cost basis of $30,000. Taking the annuity payment results in a similar liability, just extended over time with the first few months of payments being "tax free" according to the plan.
I'd be guessing. The is a time lag between annuitant's death and heir's selection for receiving funds. Annuity company is adjusting for this time and distribution. When the annuitant dies, the Contract is ENDS because the contract is between 2 parties-annuitant and company. The heir is in a NEW "runoff" policy per conditions set in original contract.
Why or why not is the basis not adjusted such that the beneficiary has no tax liability? Seems odd to me.
Original contract is ended. See above.
The accountant involved says if they issue a 1099R, which the plan says they will do, then the beneficiary assumes the original owner's cost basis.
see above
I don't get it. Help !
If you think this is complicated, think what happens in hybrid contracts, which exists because there are infinite ways to do this. You have already discovered the drawbacks of the simple method of annuity distributions-it's simple for the annuitant but may be disadvantageous to the heir of an annuitant.
Because there are infinite ways, the problem becomes pretty simple.
caveat-its been some 15 years since I looked in great detail on annuities. My comments may not be accurate.
YMMV. really YMMV
So, that article affirms what the accountant has said: The cost basis is that of the original owner.
Without giving it a great deal of insightful thinking, I wonder why they treat it that way?
Bet there is a law that governs this. The IRS wants your money. If the contract is not set up properly the insurance company keeps your money. Spouses are treated differently from child or other beneficiaries.
In your example cost basis of $30,000, current value $50,000.
If you do lump sum pay tax on the $20,000. Rate depends where you now fall in the tax table. May be better to say add $20,000 to other pay & maybe push into higher tax bracket.
If you do annuity with 5 years of payments. So you get $10,000/year. Should be less of a tax bite per year. Could be a problem if/when tax rates go higher with new legislation.
Devil is in the details when you must report $50,000 in annuity income or $10,000.
This went to two heirs. One chose to take the payments, the other chose the lump sum.
Why?
The annuitant does not have income in the "out" years which would be higher than it is now. Therefore, the payments will not change their income substantially, and the tax rate won't change much.
The lump summer has exactly the opposite. Income in the out years will be higher than present--perhaps enough to put them in the next higher tax bracket.
The cost basis for both is the original purchaser's cost basis. Bummer, but that is the way this product works.
Quite honestly, i am not sure that the person who chose the annuity payments knows what they are in for. I think that they think that their cost basis is the current value, which upon research and comment, is not accurate.
Their problem. They will figure it out eventually.
Thanks for all the comments. Tricky situation got resolved.
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