Client Inherited NON-Q Annuity from Mom-NEED HELP!!!

[rikwells]

I have a client who has a mom who just died at age 83 and he is the sole beneficiary of his mom's non-q annuity. The death benefit of the non-q annuity is 780k with a cost basis of 350k. He is 52 yrs old. He is not interested in taking the $ in a lump sum because he doesn't want to pay a lot of tax in one year and would like to stretch it out. Since it's a non-q annuity and it's non-spousal beneficiary doesn't the 5 yr rule apply or can he stretch the tax bill over his lifetime? Also, would it be possible for him to 1035 the annuity to a newer annuity with better investment options. If the 5 yr rule applies and he 1035s to a new annuity would he be subject to surrender charges and the 10% penalty prior to age 59 and 1/2 if he has to legally start liquidating?

Here's the bottom line: Client wants to defer tax for as long as possible and get into annuity with better options.

What do you guys think would be the best strategy for this situation? Thank you for your help!

 

[nathan.lee]

First of all we need to see what the current carrier will recognize. This would be the post death benefit 1035. The IRS doesn't mention anything about this and most carriers take a conservative approach and may not administer it the way we would want.

The IRS states 3 things:
A) take as a lump sum (not what we want)
B) 5 yr. payout (taking a distribution of any amount over 5 years as long as the account is empty in 5yrs)
C) take withdrawals based on single life expectancy (Bingo)

This doesn't mean any particular carrier will recognize this, but as step #1 I would recommend checking with the current carrier then you can find another carrier that will accept it. It's like finding 2 needles in a hay stack, but I am happy to help guide you along the way.