What Went Right With Dad’s Estate

My dad had an annuity.  He named his six children as beneficiaries.  In our case, this was the best way to pass an annuity.  Why? By naming us separately, we could each take our distributions when it made sense for our individual needs.

Here is how an inherited annuity works: whatever is contributed to the annuity is a return of principle and tax free.  Any gain is taxed to the beneficiaries at ordinary income tax rates.  So we need to ask, “What effects can income from an annuity have on the beneficiary, their personal situation and their tax brackets? Does the beneficiary have any control over when the income gets taxed?”

Let’s look at it:

•   One of my siblings has a business and the income was down for the year.  It made sense for her to take her distribution in 2017 – the year my dad passed away.

•   One sister was being subsidized for health insurance and the income would have reversed her funding.  It was better for her to wait until January when she could make better plans.

•   One sister was contemplating a divorce.   Her inheritance is her separate property.  No problem there.  However, if she took the money in 2017, a 1099 for the income would be sent to her in January 2018.  Both the arrival of the asset and the taxable income could have added to an already conflicted situation.  If she waited until January 2018 to take the distributions, then the 1099 would not show up until January 2019.

•   I have a daughter in college.  The added income could affect her financial aid package. It was better to wait and take the distribution in 2018.

•   One of my brothers has a business that has great growth potential Is it best to take the money and pay taxes this year or defer to the next year?

Having the ability to decide what year to take an inherited annuity was a blessing for us.  Does everyone have that kind of control?  Perhaps not.  If a trust is the beneficiary, then its’ likely that 100% of the proceeds are distributed at once.  There may be irrevocable instruction in the trust that won’t allow for flexibility.  Additionally, the issuer of the annuity may not allow for distributions at varying times.  In this case, everyone waits until the last claimant submits his/her claim.  What a disaster!

Annuities are complex.  So are the beneficiaries.  It’s important to think through these issues before the passing of the annuitant.

If you have questions or want to talk through a scenario, please reach out.  I am happy to help you.

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