Client Inherited Non-q Annuity from Mom-NEED HELP!

[Tahoe Ray]

It's a variable annuity. Client says it only has 8 investment choices to choose from. I will be doing more research on this case, like what's the M&E charges, investment charges, and I am aware that there is a fixed rate available within the VA at a guaranteed 3% minimum which is what it pays now. However if he stays in this VA and moves towards the fixed account, wouldn't he be earning less than 3% because of the M&E? Am I right with that assumption or no? This client is very investment savy and thinks other annuities might have more investment options. He's an engineer and you know how they like to talk about their options.

Do the research on what the 8 choices are....maybe there are some good options (never hurts to check). M&E is a separate account charge. A fixed account in a VA is still a general account obligation and should not be subject to M&E.

One last time and I'll stop with the CYA....talk to a tax guy/gal who knows their stuff. You could do this client a great service or create a tax mess. Maybe a good opportunity to meet his accountant? Client in common, trying to think outside the box, you could help his/her other clients with similar strategies, yada, yada...

 

[rikwells]

You don't need to annuitize to spread over the son's life expectancy. You take a distribution based on a 52yo's LE factor (you can find the table at IRS.gov) and then subtract one in each subsequent year. The distribution will be minimal and he can continue to defer the taxes for his life expectancy (or his bene can continue to defer the taxes based on his life expectancy if he dies prior to exhausting the funds).

If the son doesn't need the money right away, why go 5 year rule? Start the stretch payments this year and then if he needs a lump sum down the road, he can always take more.

If the annuity is pre-1982, the owner would have qualified for FIFO treatment so I would not exchange w/o talking to a tax pro who can verify that a non-spouse bene would be afforded that treatment as well.

I hope that this helps.

By the way, if the son is healthy there is no point in letting him make the same mistake as mom. If he wants to leave a legacy to his family, use the annual required distributions to fund a life insurance policy.....

I have one last thought:

If he does not qualify for FIFO, then the advantage of annuitizing over just taking out the required distirbution would be that by annuitizing not all of the payment would be taxable? Then, if he takes the required distribution the disadvantage would be it's entirely taxable each year? Is that correct?
I realize that by not annuitizing the biggest advantage is access to the money if he needs.

Am I correct in my thinking of the taxation of these two scenarios?

Thanks again!
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Do the research on what the 8 choices are....maybe there are some good options (never hurts to check). M&E is a separate account charge. A fixed account in a VA is still a general account obligation and should not be subject to M&E.

One last time and I'll stop with the CYA....talk to a tax guy/gal who knows their stuff. You could do this client a great service or create a tax mess. Maybe a good opportunity to meet his accountant? Client in common, trying to think outside the box, you could help his/her other clients with similar strategies, yada, yada...

I'm glad to hear that the fixed account won't be subject to the M&E! We are meeting with his attorney and CPA next week, but I just wanted to get a handle on this part of his financial plan and what all options were before annoying the hell out of my CPA. Thank you very much for all your timely responses Tahoe Ray. I really appreciate it.

I'm glad I found this forum. Everyone here is very smart.

 

[Tahoe Ray]

I have one last thought:

If he does not qualify for FIFO, then the advantage of annuitizing over just taking out the required distirbution would be that by annuitizing not all of the payment would be taxable? Then, if he takes the required distribution the disadvantage would be it's entirely taxable each year? Is that correct?
I realize that by not annuitizing the biggest advantage is access to the money if he needs.

Am I correct in my thinking of the taxation of these two scenarios?

I was kidding about the annuitization...the % that he'll have to withdraw at 52 will be relatively small. That means that he is not only sacrificing control by annuitizing, he is also sacrificing future growth (the biggest advantage to stretch).

It may be an option but without knowing his objectives, I can't provide any guidance as to what is an appropriate strategy.

The taxation of an annuitized contract vs.w/ds from an annuity that does not qualify for pre 1982 treatment is correct except that the stretch option would be taxable to basis only.

 

[rikwells]

I was kidding about the annuitization...the % that he'll have to withdraw at 52 will be relatively small. That means that he is not only sacrificing control by annuitizing, he is also sacrificing future growth (the biggest advantage to stretch).

It may be an option but without knowing his objectives, I can't provide any guidance as to what is an appropriate strategy.

The taxation of an annuitized contract vs.w/ds from an annuity that does not qualify for pre 1982 treatment is correct except that the stretch option would be taxable to basis only.

Yes, I agree with you that the growth on the stretch will be huge and that annuitization is prob not the best option. How long have you been in the business Tahoe Ray?

 

[Tahoe Ray]

Yes, I agree with you that the growth on the stretch will be huge and that annuitization is prob not the best option. How long have you been in the business Tahoe Ray?

14yrs. I've wholesaled annuities for 8....you?

 

[xrac]

Screw the tax problem.....He has what 780K with a cost basis about half that. I understand minimizing taxes but even if he pulled 100% out today he is paying tax on 1/2 whats the current highest bracket 31% and he has what 660K or so....(I have not looked back at the original post so I am probably off on the numbers). I guess my point is I wish I had his problem

Granted had the mother used some of the funds to purchase a life policy or had she moved it into even a MEC policy the son would be sitting pretty.

If I was the son I would be thanking my mothers strategy of saving for savings sake even if the OP and son think the existing annuity is lacking in options going forward.

True Norwayguy but he could be sitting even better is my point.

 

[rikwells]

14yrs. I've wholesaled annuities for 8....you?

That explains your knowledge of the annuities. I've been in this business for 6 years.

 

[Mr_Ed]

Too bad she didn't use the money to buy a life insurance policy. If so her son wouldn't have this tax problem.

they all would have been better off if she'd invested the money in dividend paying stocks instead of a nq annuity.

 

[Norwayguy]

they all would have been better off if she'd invested the money in dividend paying stocks instead of a nq annuity.

Really better off no matter what dividend paying stocks she invested in?

 

[Mr_Ed]

Really better off no matter what dividend paying stocks she invested in?

JNJ, PG, KMB, MC, PFE, CVX, COP, MO, INTC, LLY, etc...