Death Benefits and Annuities: Tips and Hints

 Annuities can help beneficiaries avoid probate expense

Annuities are contracts with written contractual provisions which include benefits paid to a named beneficiary. In the event of the annuitant (a person) dies, the proceeds from an annuity are passed to the beneficiary. The beneficiary can be a person or persons, a trust or an organization. If the annuity names a beneficiary, the funds are paid without the need of probate.

Several options are available to the beneficiary for receiving the funds. These settlement options can be a lump sum or a payment over the desired time period. If the annuity benefits include ant tax deferral (accumulated interest), the tax liability belongs to the beneficiary. As an example, if the annuity had an original $25,000 deposit that had grown to a value of $50,000 the taxable liability would be $25,000. The actual tax liability would be based on the tax bracket of the beneficiary.

Many assets inherited at the death of an estate qualify for “step up” in basis which means that the value of the asset at the death of the person could be sold based on the value at that time. If the asset were sold at or less than the value at the time of death, there would be no tax liability incurred.

Annuities do not qualify for step up in basis because they had enjoyed a tax deferral period before the death of the annuitant. If the annuitant receives the funds over a period of time, the tax liability is also “spread out” over the selected time period.

The IRS allows for the beneficiary to select a time period to make arrangements when to receive the funds. The beneficiary is allowed up to five years to defer receiving the funds and assuming the tax liability. This time period allows for the beneficiary to obtain the proper tax and investment advice as to how to proceed based on their situation.

If the annuitant before death had selected an income option for receiving money from the annuity, the payments could continue to the named beneficiary. A death claim would need to be filed so tax liability and payment selections could be made.