tax waivers on annuities for beneficiaries
Client passed away and left an annuity to brother.
This is a note that I received from an tax attorney in NJ:
“[color=#4000FF]A NJ tax waiver should have been obtained and given to the annuity company. Tax waivers for the decedent’s accounts are issued only after tax is paid. Mr. smith took a five year option deferral. His tax will be on the full date of death value[/color]”.
Questions:
a. I thought annuities by-passed probate and beneficiaries to non-ira annuities had to pay the tax on the gain in the annuity over the cost basis of the owner?
b. Can you give a tax waiver to an annuity company and thereby make the whole annuity to the beneficiary tax free since the estate paid the taxes?
c. If we didn’t do the waivers, doesn’t the beneficiary only pay tax on the gain or the full date of death value as the attorney mentioned?
Thank you very much for any help
Douglas
Permalink Submitted by Alan Spross on Tue, 2012-11-20 22:25
The tax waiver is for the inheritance tax due, not income taxes. The brother is a Class C beneficiary – see the following:
http://www.state.nj.us/treasury/taxation/pdf/other_forms/inheritance/o10…
The income tax due is only on the gains in the annuity, and generally the gains come out first if the annuity was purchased after 1982. Sounds like NJ may want the full inheritance tax paid up front even though annuity will be paid out over 5 years.
Permalink Submitted by Bruce Steiner on Wed, 2012-11-21 21:39
The default is that each beneficiary pays his/her own inheritance tax, and the beneficiaries of nonprobate assets pay their share of the estate tax. However, in many cases, the Will provides that the taxes are payable out of the residuary estate.
To secure the tax, New Jersey generally freezes some or all of the assets. The financial institution generally can’t release the assets, or can only release a portion of the assets, until the estate gets a release (called a tax waiver) from the state. In the meantime, the estate or beneficiary can move money from one investment to another, but just can’t remove the money from the financial institution. If the financial institution pays out the money without getting a tax waiver, they can be held responsible for the tax if it’s not paid.
The New Jersey inheritance tax return is due 8 months after death. It’s usually filed with the estate tax return, which is due 9 months after death (and is usually put on extension for another 6 months). The inheritance tax is due 8 months after death, with an interest charge beyond that point, so it usually makes sense to pay the tax within 8 months.
There is no New Jersey inheritance tax on transfers to certain relatives, such as the spouse and children. However, transfers to a sibling are subject to inheritance tax. The New Jersey inheritance tax is effectively a credit against the New Jersey estate tax, so there’s no double tax.
The lawyer should be preparing the estate and inheritance tax returns and getting the tax waivers. New Jersey will automatically issue the tax waivers once they’ve completed the examination of the returns.
Permalink Submitted by Douglas Bauerband on Wed, 2012-11-21 22:07
but no one seems to be able to answer the question:
when a person passes away and leaves an annuity, which has a beneficiary, to a brother. an annuity company has never needed a waiver but the beneficiary fills out the claim form and receives the money or takes a 5yr deferral. we are talking non-ira.
There is no inheritance tax to the brother that receives the annuity. the only tax he pays is on the gain when he withdrawals the money, if any gain, on his bottom line income.
[b][u]the question is[/u][/b]: if the annuity is included in the inheritance tax of the deceased for estate tax purposes and the estate pays the tax…is the annuity gain, if any, still taxable to the brother?
Permalink Submitted by Bruce Steiner on Wed, 2012-11-21 23:11
Surely the lawyer handling the estate knows, or else you would be working with a different lawyer.
While most assets get a basis step-up for income tax purposes, certain types of assets, called income in respect of a decedent (IRD), do not. Some common types of IRD are retirement benefits, annuities, and the decedent’s final paycheck received after death.
Since there’s no basis step-up for the annuity, the estate or beneficiary takes over the decedent’s basis in the annuity. Any amount the beneficiary receives in excess of that amount is taxable to the beneficiary as ordinary income.
To avoid double tax, the beneficiary gets an income tax deduction for the Federal estate tax (but not the state estate or inheritance tax), at the marginal rate.
The lack of basis step-up is one of the disadvantages of this type of annuity.
Permalink Submitted by Ena Suggs on Fri, 2013-03-29 06:25
The whole annuity turning taxfree won’t be possible I guess. However the rules do change state and companywise a bit so in any case have a final checkout from lawyer or the official who forwarded You the above mentioned note.annuity cash
Permalink Submitted by aaliyah jorje on Mon, 2013-05-06 09:30
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