Inherited Annunity

[geekgirldany]

Client's father passed away. Father had life insurance annuity of $50,000 that is payable upon death to my client.
But the will states to split it with his siblings.

From my understanding with an annuity, only earnings are taxable and contributions will be shown on the 1099R. Is that correct?

Also is there a way that my client can not pay tax on what is received since he will be splitting it with the other siblings? Paying tax on what he actually receives.

Never had this come up before so would appreciate input.
Dany

[Burke]

The will has no control or validity regarding this asset since it had a named beneficiary on the contract, and therefore it is not part of the deceased's estate. It passed outside of the estate to the beneficiary designated. That beneficiary does not have to split it with anyone, although he may give them a portion of the proceeds if he wishes. It will all be taxable to the bene. So until he/she knows what the tax will be, I would not be parceling anything out, since he will probably want to deduct their share of that tax from what he gives them. If the annuity has basis (non-qualified) then only the earnings will be taxed. If it was qualified (IRA), then all is taxed. The 1099R will show Gross in Box 1 and Taxable in Box 2 if there is basis.

[geekgirldany]

Thank you so much Burke.

[mastertaxguy]

Will vs Annuity

The will has no control or validity regarding this asset since it had a named beneficiary on the contract, and therefore it is not part of the deceased's estate. It passed outside of the estate to the beneficiary designated. That beneficiary does not have to split it with anyone, although he may give them a portion of the proceeds if he wishes. It will all be taxable to the bene. So until he/she knows what the tax will be, I would not be parceling anything out, since he will probably want to deduct their share of that tax from what he gives them. If the annuity has basis (non-qualified) then only the earnings will be taxed. If it was qualified (IRA), then all is taxed. The 1099R will show Gross in Box 1 and Taxable in Box 2 if there is basis.

I disagree.

The will, if submitted to probate, in some jurisdictions may control over the beneficiary designation(s). A contrustructive trust theory may be imposed by a court. TP should consult an attorney in the state where the decedent was domiciled. Further, if TP and decedent agreed to some sort of distribution plan, the other beneficiaries could bring proceedings to compel enforcement of what amounts to a contract. Properly done, such a dispute would leave nothing for TP and/or siblings but enrich the attorneys, leaving the taxprofessional another uncollectable bill while tying up the money for some time.

In theory, if TP/client gives away proceeds from the annuity to siblings or others, TP is making a gift which, from the facts, likely is not taxable but might trigger a 709 return.

From a strickly tax note, TP could file a statement that he received the taxable portion of the annuity as a nominee (in effect), and list the name(s), ss#'s and addresses of the the others receiving a share of the proceeds.

[Burke]

I disagree.

The will, if submitted to probate, in some jurisdictions may control over the beneficiary designation(s). A contrustructive trust theory may be imposed by a court. TP should consult an attorney in the state where the decedent was domiciled. Further, if TP and decedent agreed to some sort of distribution plan, the other beneficiaries could bring proceedings to compel enforcement of what amounts to a contract. Properly done, such a dispute would leave nothing for TP and/or siblings but enrich the attorneys, leaving the taxprofessional another uncollectable bill while tying up the money for some time.
.

I am afraid you are incorrect. No court has any jurisdiction over an asset that is not part of the estate. And the heirs have no claim to the money if it is not part of the estate. The will cannot direct the disposition of assets that are not part of the estate. The contract was between the insurance company and the annuitant. The heirs can always sue, but unless they can prove the annuitant changed the beneficiary after the will was written, and he was either incompetent, or coerced by the beneficiary into signing something of which he was unaware, it stands.

[Burke]

From a strickly tax note, TP could file a statement that he received the taxable portion of the annuity as a nominee (in effect), and list the name(s), ss#'s and addresses of the the others receiving a share of the proceeds.

He cannot do this. Taxable income cannot be legally shifted to other parties just because he gives those other parties a share (or all of it for that matter.) The nominee option is for income that is jointly owned.