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An annuity is a financial product that grows funds transferred from a person and then begins making a series of payments at a later specified time. Usually people will time the annuity to mature during retirement years in Maryland and elsewhere. On the other hand, when a person dies before an annuity matures a death benefit is paid out to a beneficiary, who is usually the intended heir during estate administration. However, this leaves some options for the heir to consider making in terms of how to receive the death benefit.

In a first impression private letter ruling, the Internal Revenue Service (IRS) has suggested that the agency will possibly allow a valuable option for managing inherited annuity accounts. The private letter ruling addressed a specific heir whose mother possessed various fixed annuity contracts as well as a variable annuity contract. The heir, who was the beneficiary of all of these annuities, as stated in the contracts was provided with death benefits once her mother died prior to the start date of the annuity.

The heir chose to receive the death benefits from the annuities over her expected lifetime. However, she also attempted to increase the amount of payout she was set to receive by applying for a new contract with a different annuity company. The amounts from the original annuities were to be paid directly to the new company which would then credit the payments into the new annuity account. The new annuity was set to immediately begin paying out, which would essentially replace the payouts that would have been received under the original annuity contracts.

The private letter ruling from the IRS essentially expanded Section 1035 of the Internal Revenue Code to allow the heir to be legally considered the owner of the original annuity for taxation purposes, which means she was able to exchange the annuities without being liable for taxation. However, the IRS is only bound by private letter rulings for the person who originally requested the ruling and therefore they cannot be used as precedent in other requests from individuals in Maryland or any other state. The ruling can only be used as a guide to how the IRS will likely rule in a similar situation, therefore a proficient knowledge of all relevant laws is essential when making decisions regarding inherited annuities and other estate administration decisions.

Source: WealthManagement.com, Post-mortem 1035 Exchange of Annuity Allowed, Michelle L. Ward, Sept. 3, 2013

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