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Common Questions Answered about Inherited Annuities

Stan Haithcock
May 9, 2021
Common Questions Answered about Inherited Annuities

First, not all inherited annuities are the same. If you inherit an annuity and you want to make a good decision, you could skip this article completely and just book a call with me and my team. And we will walk you through all of the choices that are available to you and give you some counsel on maybe which one you should choose based upon your specific situation. And also, when you inherit money like this you should always contact your local CPA or tax lawyer, somebody you work with and make sure that you're dotting all the I's and crossing all the T's on your estate plan from a tax standpoint from the federal and state level.

Ok now that we have that PSA out of the way, let’s get into some of the most common questions we get from clients about inherited annuities.

Can you cash out an inherited annuity?

Yes, you can cash it out. If dad dies and you're the beneficiary of that annuity, you have the opportunity with most policies, not all, to cash out. Unfortunately, it’s like herding cats, but in most cases, you have the opportunity to take that death benefit lump sum.

Can you roll over an inherited annuity?

Maybe. Not all annuities are the same type of annuity. Not all carriers are the same. Not all the rules are the same. Rolling over an annuity is not a carte blanche. I’ll give you an example. You're the son and your father died and leaves you in an annuity. Some carriers will allow you to take a five-year payment of that death benefit to stretch out that tax liability. Some will allow you to annuitize that amount over time. Some will allow you to take that full cash death benefit and then some will allow you to roll over, transfer it to something else, but not all.

Once again, when this happens, when you inherit the annuity, whether you're the spouse or you're the kids or you're the grandkids, I would implore you to make an appointment with me or someone else you can trust to find out what you don’t know and what your options are for your inherited annuity.

Do you have to pay taxes on an inherited annuity?

You do. And that's confusing. Life insurance companies issue annuities, but annuity death benefits are taxable, they're not tax-free. So you're going to have to pay taxes on an inherited annuity. Now, the good news is, most carriers, most annuity companies will give a surviving spouse or beneficiary payout options. Obviously, you could receive a lump sum and you're going to pay taxes on that lump sum. Or you could say, "You know what? I don't want the lump sum payout. I want to kind of stretch out those taxes." A lot of these companies will allow you to take that death benefit over a five-year time period. Not all, but a lot. And then some will allow you to annuitize, meaning turn that death benefit into an income stream and then stretch out that tax liability over your life expectancy.

The bottom line is regardless of how you chose to receive payments, you are going to have to pay the IRS. So take your time when making the decision on how you want to take that money, how you want to access that death benefit from the inherited annuity./p>

Does an inherited annuity get a step-up in basis?

The answer is no. You're going to have to pay taxes on those gains as the new annuity owner. If someone says you can get around paying the taxes, they're not telling you the truth. You are going to have to pay the taxes on those gains. And sometimes the tax implications can be pretty painful because for some of these deferred annuities like variable annuities or whatever that have been growing for a long, long time, the cost basis is very low and the tax liability is very high because it's grown.

But hey, it is what it is. The big ole internal revenue service is not going to change the rules because they allow that tax-deferred growth for so long. They are going to get their share. But you do have to understand that annuities, unfortunately, do not get a step-up basis at the time of death.

If you have more questions, don’t hesitate to book a one-on-one call with me anytime by using this link.

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