Non Qualified Annuity Holder Died

[equinecpa]

I'm assisting an elderly lady straighten up her financial affairs after the passing of her husband this past May. He had a non-qualified annuity of which she is the sole beneficiary. It is not yet transferred to her name. I notified the company that holds the annuity of the annuitant's passing and they are sending paperwork to my client so that she can access the funds.

My question: The annuity is valued at $105,000. The deceased ACB in the annuity is $100,000. Will the $5,000 be automatically considered income on the 2009 tax return? I'm not sure if my client will be able to have the paperwork complete by year end, as she has not received it as of today and is leaving out of town for the holidays.

I'm trying to figure how much dollars she should take as a distribution from her IRA and need to know whether the $5000 from the annuity will definitely be included in income. She has the option to renew the contract to term, partial withdrawl or withdraw the whole thing. My conundrum is she won't be dealing with it until 2010 -I imagine if she elects for a partial withdrawl (the income portion) it will be 2010 income as it is distributed in 2010?

Thanks

Carolyn

[Bees Knees]

Even with a non-qualified annuity, the spouse of the deceased annuity holder can treat the annuity as his or her own annuity. Thus, she does not recognize the $5,000 all at once assuming she continues to take distributions at a rate at least as rapidly as what her husband was taking.

[New York Enrolled Agent]

Even with a non-qualified annuity, the spouse of the deceased annuity holder can treat the annuity as his or her own annuity. Thus, she does not recognize the $5,000 all at once assuming she continues to take distributions at a rate at least as rapidly as what her husband was taking.

Bees

I'm reading this differently than you are. I'm under the impression this is a non-qualified annuity that was NOT yet annuitized. If my reading of the OP is correct (and I stand to be corrected) this would be (in code jargon) treated as an amount not received as an annuity and the beneficiary would be taxed on the $5,000 gain over the cost basis. §72(h) provides an exception if the beneficiary (within 60 days after the death benefit is payable) opts to take an installment payout. If the husband was taking payments under an annuity payout, then that's a different story and I would agree with you.

[Bees Knees]

Bees

I'm reading this differently than you are. I'm under the impression this is a non-qualified annuity that was NOT yet annuitized. If my reading of the OP is correct (and I stand to be corrected) this would be (in code jargon) treated as an amount not received as an annuity and the beneficiary would be taxed on the $5,000 gain over the cost basis. §72(h) provides an exception if the beneficiary (within 60 days after the death benefit is payable) opts to take an installment payout. If the husband was taking payments under an annuity payout, then that's a different story and I would agree with you.

Well, I was assuming the spouse would elect to take an installment payout if the husband was not already receiving an annuity payout. I assume that is why they were in the process of transferring the annuity over to the spouse. If the wife was just going to cash it in, why transfer it over into her name first?

[New York Enrolled Agent]

Well, I was assuming the spouse would elect to take an installment payout if the husband was not already receiving an annuity payout. I assume that is why they were in the process of transferring the annuity over to the spouse. If the wife was just going to cash it in, why transfer it over into her name first?

Why make the assumption that the wife is cashing in the $105K?

Annuities are not for every situation but INTEREST Rates are higher on fixed annuities than bank products.

Only Carolyn knows the elderly lady's financial situation but I would make no assumptions. Given that the typical fixed annuity contract allows for an annual 10% no-surrender charge withdrawal, it MIGHT be advantageous to do a single-premium annuity for her. We don't know the facts.

Coincidentally, today's (12/26) edition of the New York Times has a front-page story on "tiny rates". The opening paragraph states; " Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings account and certificates of deposits."

On a personal note, an elderly relative (I don't handle the finances, only the taxes) has some money in a bank savings account (interest rate = .1%, not 1% but .1%) and some money in a fixed annuity ( interest rate = 3%). Certainly, a lot different!!!

[JoshinNC]

Good points NYEA

Why make the assumption that the wife is cashing in the $105K?

Annuities are not for every situation but INTEREST Rates are higher on fixed annuities than bank products.

Only Carolyn knows the elderly lady's financial situation but I would make no assumptions. Given that the typical fixed annuity contract allows for an annual 10% no-surrender charge withdrawal, it MIGHT be advantageous to do a single-premium annuity for her. We don't know the facts.

Coincidentally, today's (12/26) edition of the New York Times has a front-page story on "tiny rates". The opening paragraph states; " Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings account and certificates of deposits."

On a personal note, an elderly relative (I don't handle the finances, only the taxes) has some money in a bank savings account (interest rate = .1%, not 1% but .1%) and some money in a fixed annuity ( interest rate = 3%). Certainly, a lot different!!!

I have moved several clients fixed portion of their investment portfolios into fixed annuities over the last 18 months. About 10 months ago I was able to move several clients into a 6 year fixed contract paying 5.7% for the first 12 months and they can pull all thier money out at the end of the 1st year if the insurer doesn't renew at a minimum of 4%, and every year thereafter. They are VERY HAPPY to be earning 5.7% and to know that the insurer will most likely renew at more than 4%. All annuities are not bad (contrary to what the average talk show host will tell you) and cashing them out to move into "safe" or more liquid investments is not always the best long term strategy.