Need advice on Inherited? Annuity IRA Multiple Beneficiary

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Topic Author
comehither2k18
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Joined: Fri Dec 29, 2017 8:23 pm

Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by comehither2k18 » Fri Dec 29, 2017 9:37 pm

My first post and not I'm too familiar with IRA's/Annuity terms so please go easy on me but I sure am glad I found this site.

My mother-in-law recently passed and my wife found out she is one of multiple beneficiaries of 3 separate contracts/accounts. The step father/executor is not one of the beneficiaries of these accounts. The list of beneficiaries are made of of the mother-in-laws' children and grandchildren.
We just received the "annuity death benefit claim forms" and this is where the confusion starts. The forms only contain contract numbers and disbursement options. Unfortunately the executor hasn't given us any other details so we are being forced to try and find out the information ourselves. We still havent called Bankers Life which is where the accounts are.
This is all we we able to find out ourselves so far regarding the accounts:
Account A: Tax Qualified Single Premium Deferred Annuity IRA
Account B: Tax Qualified Single Premium Deferred Annuity IRA
Account C: Non Tax Qualified Single Premium Deferred Annuity.(don't think its an IRA)

We are looking for advice on how to proceed. My wife and 2 children(one over 18 but still living at home and on our taxes) will be getting a percentage of all 3 accounts. Wife gets around $28K and each kid gets around $5,500. Not big number but still something. The estimated amounts per account are as follows.
Account A: Wife-$4K and each child $850
Account B: Wife - $19K and each child $4K
Account C: Wife - $3.5K and each child $750

Our main focus is to try and not screw ourselves on taxes and figure out what is the best way for the kids portion. We don't want the underage kid touching it until she is 18 at least. The older one may want to use her share to help pay for her college in 2018. My wife's intention would be to use about $6K to pay off some annoying debt and save the rest for retirement. At the same time we don't want to go over the household income caps for the New York State free tuition Program.
We don't want to stay with the mother-in-laws Bankers Life if we don't have to and would prefer to find someone else for reinvesting but the paperwork they sent almost seems to have only 2 options of taking lump sum and getting whacked with taxes next year or signing up for something they call "BenefitNow Account"??

SO in a nut shell...what should we do????
Up until now our finances were pretty simple. Hell, I don't even remember the last time itemized but I have a feeling 2018 taxes will be done by someone other than myself. That will be a first! Hope someone can guide us in the best direction..
Thanks in advance!

ccieemeritus
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by ccieemeritus » Sat Dec 30, 2017 5:26 am

I’m executor for Moms estate and am helping 5 beneficiaries (my kids, nephews, and nieces) inherit from 2 source IRAs.

First, since the IRA has beneficiaries listed it falls outside of probate. The executor and will have nothing to do with it. But many executors help with paperwork as a courtesy.

Check out IRS publication 590-B
https://www.irs.gov/publications/p590b

Particularly the “inherited from someone other than spouse” section. Then the “IRA beneficiaries” section. In my Moms case she was 79 (more than 70 1/2) so RMDs were already required.

The first step is to call the estate department at the brokerage. They will want to see a certified death certificate but that may already have happened since they called you. The executor should have one. If not get it from the county. Expect to pay $15.

In moms case each of the IRAs was split into 5 IRAs. Each grandkid got an IRA funded with 20% of the original. We were able to elect lifetime distributions (as opposed to 5-year or immediate distributions). So each grandkid is required to take out a RMD of about 2% per year over their lifetimes. But they are NOT forced to take it all out.

The humans at the estate department are very helpful. I think brokerages put some of their nicer people there. Definitely call with your questions.

For minor children the brokerage requires a parent to control the account. The forms didn’t have a spot for that but the estate department explained to send a letter with the application with SSN, DOB, address, phone, and explaining you are the parent and will control the account until age 18. At that point it’s the kids money.

After the kids inherit my plan is to rollover/consolidate the IRAs to Schwab, if possible. The destination IRA will also have to be a newly created beneficiary IRA. It’s not obvious which form to use for that. I’ll have to call.

whyamihere
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by whyamihere » Sat Dec 30, 2017 8:24 am

Think of the IRA like a bucket: there was an annuity in your mother-in-law's IRA and now the wife and kids are inheriting the IRA. The insurance company can transfer the funds to another company, of the beneficiaries' choice, via a trustee-to-trustee transfer (for IRAs) or a 1035 (for the non-qualified annuity). If it all stays in the bucket the IRS doesn't view it as a distribution. Know that this is especially important with inherited tax qualified assets.

Some potential pitfalls:
-Inherited IRAs have a required distribution each year if you stretch it over the beneficiary's life. It takes a little bit of math but could be the most tax-efficient method (smaller distributions each year compared to lump-sum or the 5-year rule). For kids the initial distributions could be <$100 and allow what funds are there to compound tax-deferred for decades.
-Small account sizes are hard to invest. Some investment funds will have minimum investment requirements (like mutual funds) so you may be forced to use ETFs. Trade costs could eat up your funds.
-The account type, a beneficiary IRA AKA inherited IRA, has some different rules from normal IRAs. It could make sense to get some time under a fee-only agreement with a CFP that deals with inheritance and insurance. The account name will look like "IRA of M-I-L, deceased 12/1/2017, DW, beneficiary."
-The NQ annuity can be transferred and maintain its tax-deferral but with that account size it would be very hard. Depending on the basis you may just want to surrender the annuity and use UTMA/UGMA for the kids to reinvest. There is no step-up for the annuity in regards to cost basis.
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westrichj312
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by westrichj312 » Sat Dec 30, 2017 8:31 am

Amounts are small I would just take out lump sum and pay the taxes. Otherwise your taking a little each year and still paying the taxes.

Topic Author
comehither2k18
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by comehither2k18 » Sat Dec 30, 2017 10:18 am

Thank you for the quick reply.
We will certainly need to call Bakers Life and talk to someone in the estate department.
Looking ahead, I think our as of now our main concern is keeping our 2018 household income below $125k. The reason for this is because 2018 income will be reported on the FAFSA for my oldest kids final(hopefully) year of college 2020-21. Here is NY this past year started the The Excelsior Scholarship -free tuition if requirements are met including houeshold income levels. This equates for her, to about $12K per school year scholarship, which she got this year. The FAFSA forms for the 2020 year will be based on 2018 household income. Our estimated household income for 2018 will be around $110K leaving us with a $15K allowance for additional income. Bottom line is if we make a dollar over $125k, she won't be eligible for the Scholarship and would incur an additional $12K in student loans her final year. Basically we would be throwing away $12K if we take lump sum now.
Ive made some bad financial choices regarding this in the past and I dont want to repeat it.LOL

ralph124cf
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by ralph124cf » Sat Dec 30, 2017 11:09 am

I am surprised that an annuity can be inherited. Normally any annuity payments, especially single premium deferred annuity payments, stop with death of the owner.

Many things are sold with annuity in their name that have nothing to do with annuities. Find out what this investment actually is.

Ralph

quantAndHold
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by quantAndHold » Sat Dec 30, 2017 11:12 am

The only taxes you’ll pay are on the withdrawals. You’ll have to take RMD’s, but for those amounts and the ages of the recipients, you’re only talking about a few hundred dollars per year. If you google “IRA RMD calculator,” you should be able to figure out the amounts.

Beyond that, I would take possession of the accounts where they’re at, then once you have possession of the account, roll it to wherever you have the rest of your accounts, and invest in something appropriate for your own needs.

whyamihere
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by whyamihere » Sat Dec 30, 2017 8:32 pm

ralph124cf wrote:
Sat Dec 30, 2017 11:09 am
I am surprised that an annuity can be inherited. Normally any annuity payments, especially single premium deferred annuity payments, stop with death of the owner.

Many things are sold with annuity in their name that have nothing to do with annuities. Find out what this investment actually is.

Ralph
If it wasn't annuitized it could have cash value that goes to the beneficiary. Can be common with annuities that use guaranteed lifetime withdrawal or guaranteed income benefit riders.
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Alan S.
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by Alan S. » Sat Dec 30, 2017 10:11 pm

Non spouse IRA annuity beneficiaries are subject to the distribution options provided by the life insurance company. Often, these options are not attractive. If the forms provided do not clearly explain the options such as the "Benefit Now Acct", call the insurance company.

Since the amounts are modest per beneficiary, your wife is the only one that might look to stretch the distributions. The kids inherited amounts are too low to bother with stretching options, annual kiddie tax calculations, transfers to new custodians etc. Although, starting early in 2018 your wife might also opt for the lump sum and use the money to subsidize contributions to her own retirement accounts or even to yours, which will not have to be tapped for decades. That might offset the taxable income and not affect the NYS tuition subsidy.

There might be pressure for all beneficiaries to coordinate their response, if not their selected option. Most critical, be very careful NOT to indicate a distribution if one is not required or elected. A 60 day rollover CANNOT be done if a distribution is issued and one was not desired.

The NQ annuity could be treated the same, or could have different options offered. NQ annuities follow the annuity tax rules, whereas IRA annuities follow the IRA tax rules. The NQ annuity should only be partially taxable. The IRA is likely fully taxable, but check if MIL might have had IRA basis as documented on Form 8606 in her prior tax returns. If so, a portion of the IRA annuities would not be taxable.

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Epsilon Delta
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Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by Epsilon Delta » Sat Dec 30, 2017 10:51 pm

I believe that withdrawals from the inherited IRAs will qualify for the deceased mother-in-laws $20,000 per year retirement income exclusion from NY State income tax. This provides an incentive to split distributions across multiple years. The $20k has to be coordinate across all beneficiaries, including the step-father if he inherited something else that qualifies.

Topic Author
comehither2k18
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Joined: Fri Dec 29, 2017 8:23 pm

Re: Need advice on Inherited? Annuity IRA Multiple Beneficiary

Post by comehither2k18 » Thu Jan 04, 2018 7:27 pm

Thanks for all the advice so far. Wife is going to call Bankers Life in the next few days in hopes they will help clarify our options but we just want to make sure we understand what we are asking ourselves if that makes any sense.
I have a few questions that hopefully someone can point us in the right direction or recommend to me if I should post them in a different thread.

As I mentioned earlier, our main goal is to keep our " household income" for 2018 under $125K AGI because of the New York free tution income limit. I estimate we will have about $21K wiggle room meaning I don't want to add $21K to our 2018 taxes.

I broke my questions down into 3 parts:

The easiest part will be our oldest child who basically needs the money for college now. Her part will be about $5.5K. I'm assuming we should have BL withhold 10% for taxes? She also works part time but makes under $4k/year. Now that she is 19, and getting the $5. K, I believe she will have to file her own tax returns?

Our intention for our youngest is to put her $5.5K in some sort of account that will grow some for her but would allow her to touch for the next 4 years. Any suggest as to what kind and where??? I'm assuming we should have BL withhold 10% for taxes on that too?

Now I'm assuming those above will add $11K to our income for 2018. That would only allow us to add >$10K if we want(which we do!) to keep our total AGI under $125K for the tuition guideline.

Now the confusing part that hopefully Bankers Life and this forum can shed some light.
BTW I have heard some bad things about Bankers Life's business practices so I think we would prefer to distance ourselves from them as soon as possible. If we can stretch out getting her money, we would rather have it with a different company, not BL.
Is setting up an inherited IRA option allowed for wife's money or is that strictly up to BL to decide based on how the mother-in-law set up the contracts originally?
Thanks again in advance!

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