When we learn about annuities, and it’s various related aspects, it is important to get a clear understanding about the tax consequences of inheriting an annuity. This concept needs important consideration right at the incepting stage since once the signatures appear on the dotted line, the plans and prospects would not get repealed. At the time of inheritance, the beneficiary possibly would have many things over his mind. He might be struggling with the loss of his near and dear one. On top of everything, it is very much possible that the beneficiary may fall in the lofty tax bracket when he is to receive the benefits of annuity. Keeping in mind all such possibilities, let us analyze some more aspects of tax consequences of inheriting an annuity.
Most people have a wrong concept that an annuity inheritance is completely tax free and all the money pouring in are the death benefits. This is completely false. Income that comes by the source of an inherited annuity, is not hundred percent free from tax. The taxation certainly gets applied on at all event earnings or gains come to the inheritor barring the principal amount. In order to save the tax to certain level, it is advisable to further put the annuity in another annuity-mode for at the minimum 5 years. The payments would get delayed, saving over the tax upto a certain extent year after year. The experts are of opinion that sometimes it is better to receive the annuity benefits over a stretched period of time instead of receiving them in a lump-sum amount. The lump sum receiving of payment may raise the tax-bracket upto important extent.
If the spouse is the annuity heir or beneficiary then the benefits go to him or her in the form of ‘spousal continuation’. Since a spouse is the default inheritor has natural legal right of continuation of contract, they can take decision of receiving the payments in the stretched out format in order to save over the taxes. The tax consequences of inheriting an annuity by non spousal beneficiaries have several choices at their disposal. They can avail the option of continuing with the annuity and alter the ownership as per their own preferences. They can also spread out their payment spanning for next five years consequently to save tax year by year upto some extent. They can also opt for receiving their payments for remaining years of their life in the form of equated installments. Just like spousal beneficiary, the non spousal inheritor also has the option of further investing the cash benefits into another appropriate annuity plan.
All these aspects of tax consequences of inheriting an annuity may appear confusing or complicated but needs careful consideration for long term benefits. consequently, contact your financial advisor today and find out details about the exact annuities that are obtainable for you and which ones would be ideally suited for your particular requirements. With proper planning, you will be able to get the required benefits from a good annuity plan.