Mom inheriting variable annuity within IRA from Dad

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ldebhaar
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Mom inheriting variable annuity within IRA from Dad

Post by ldebhaar » Sat Aug 10, 2019 11:19 am

My dad just passed away in July at the age of 79. He has a variable annuity within a traditional IRA which was not annuatized (not receiving monthly income). He did get his RMD paid out in May. My mom, also age 79, is the sole beneficiary. My understanding is the best option for her is to rollover dad's IRA into her own IRA which is through Vanguard. She can then cancel the annuity policy and use the funds for better investment options for herself. The variable annuity policy was worth around $250,000 but the death benefit was $374,000. I'm not sure if it matters if we cancel the annuity policy before or after it is rolled over into mom's IRA? Any other thoughts or concerns?

FoolStreet
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Re: Mom inheriting variable annuity within IRA from Dad

Post by FoolStreet » Sat Aug 10, 2019 12:34 pm

ldebhaar wrote:
Sat Aug 10, 2019 11:19 am
My dad just passed away in July at the age of 79. He has a variable annuity within a traditional IRA which was not annuatized (not receiving monthly income). He did get his RMD paid out in May. My mom, also age 79, is the sole beneficiary. My understanding is the best option for her is to rollover dad's IRA into her own IRA which is through Vanguard. She can then cancel the annuity policy and use the funds for better investment options for herself. The variable annuity policy was worth around $250,000 but the death benefit was $374,000. I'm not sure if it matters if we cancel the annuity policy before or after it is rolled over into mom's IRA? Any other thoughts or concerns?
My condolences for your loss.

I’m not an expert but 9 out of ten times transferring to Vanguard is always the right thing to do. I’m sure others can give real advice, but I have some questions.

Is the current value 250 or 374? If 374, did the death benefit pay out in cash value (presumably still in the IRA) or is it still inside of an annuity(inside Dad’s IRA).

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Stinky
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Re: Mom inheriting variable annuity within IRA from Dad

Post by Stinky » Sat Aug 10, 2019 2:15 pm

ldebhaar wrote:
Sat Aug 10, 2019 11:19 am
The variable annuity policy was worth around $250,000 but the death benefit was $374,000.
Sorry for your loss.

What do you mean by the sentence above? How much is available to your mother now - $250 or $374?
It's a GREAT day to be alive - Travis Tritt

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celia
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Re: Mom inheriting variable annuity within IRA from Dad

Post by celia » Sat Aug 10, 2019 2:45 pm

As long as you, assumedly, will be calling the old custodian about this annuity inside a tIRA, you need to ask if there are fees for closing the account or transferring the money out. Do the fees decrease/ increase each year that goes by? Hopefully, the death (which I'm sorry to hear about) offers an "exception" to some of the fees. (As far as fees, think of this like a bank CD that was locked in long term, but it can be withdrawn because of the account owner's death without an early withdrawal penalty from the bank.)

Be especially wary about them trying to roll the money into an IRA for your mom where they could take out the up-front fees again (for the new account).

I assume that you already know that variable annuities are terrible products. Those who sell them usually don't understand how they work except they know they will get a good commission. Since you are not interested in getting a new annuity, try to talk to corporate about how to get the proceeds paid out rather than to a salesman.

And you don't have to make a decision while on the phone. You have time to come back here and share more details, if you aren't sure what is best to do.

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Re: Mom inheriting variable annuity within IRA from Dad

Post by Northern Flicker » Sat Aug 10, 2019 3:26 pm

My condolences for the loss of your father.

I once read some recommendations from a planner, one of which was to spend the most time analyzing decisions that are irreversible once executed. This applies here.

A few things to consider carefully:

Are there any surrender charges or other fees for liquidating the annuity? Be sure they are reasonable and/or you do any liquidation at a time when there are no such fees, or that they are reasonable amounts, like there is a $50 closure fee, not an 8% surrender charge.

It sounds like there may be a death benefit that would enable a lump-sum distribution with minimal or no fees, which is great if so. It may enable an easy rollover of cash to an IRA mutual fund or brokerage account.

But before doing that, evaluate the options to annuitize the asset within the existing annuity, that is, taking the distribution as a lifetime income stream. Compare the payout rate with the payout rate of a lifetime income annuity (SPIA) you could buy from Vanguard or immediateannuities.com. It could be that the payout rate of a lifetime income annuity within the current product may be higher because no new commission will be wrapped into the rate. The sales commission was likely wrapped in when the variable annuity was originally purchased.

If the lifetime income payout turns out to be higher within the current product, then before doing the rollover would be the time to analyze your mother’s need for a lifetime income payout. It also may be possible to take some of the death benefit as a lump sum to roll over, and some as a lifetime income payout.

Partial annuitization might be designed so that this income plus social security covers your projected living expenses, a technique called income flooring. The annuity income probably won’t be inflation adjusted, however. Another idea would be to annuitize some or all of your mother’s fixed income allocation, perhaps have a fixed income allocation that is 50% lifetime income annuity and 50% TIPS.

Now, I’m not saying that such annuitization should be done. My point is just to evaluate the options for doing so before doing a rollover of a lump sum distribution to an IRA. If there is no payout rate advantage compared to a SPIA your can buy, then the rollover of a lump sum would just be executed at any time when there are no surrender fees or similar closure fees.

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ldebhaar
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Re: Mom inheriting variable annuity within IRA from Dad

Post by ldebhaar » Sat Aug 10, 2019 4:15 pm

The policy lists the death benefit as just over $374,000. I don't know how this will be paid out, if it will be as cash within the IRA or within the variable annuity. I was going to call Monday to ask some questions. I want to help my mom get this right, so we don't want to make any moves until we have more information. I started helping my parents with their finances in the past few years. Dad had been talked into this variable annuity in 2009. I wanted to have him get rid of the policy but after evaluating the terms and realizing he was likely going to pass away this year, we decided to keep it in order for my mom to get the higher value of the death benefit. My mom does not need an income stream and the fees are quite high for this annuity. Since my dad has had it since 2009 there is a minimal surrender charge ($30). However I don't know about fees charged to rollover, etc. Good questions for me to ask.

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Re: Mom inheriting variable annuity within IRA from Dad

Post by not4me » Sat Aug 10, 2019 5:18 pm

1st, sorry for your loss. Even knowing it was coming, this can be a difficult time. It is good you seem to have a handle on things. Details will be important.

2nd, before calling the annuity company, call Vanguard. Even if they weren't where the $s were headed, they know about most VAs & will provide advice. There are a couple of areas to watch. Vanguard may not accept an in-kind transfer of this specific VA; the VA company may not send it either. So, that part may not be an option.

I didn't notice if there were other assets in this IRA of your father, but assuming not. I'll only mention this as a remote possibility, but your mother may be able to "disclaim" this for estate planning purposes (this depends upon several things, but unlikely something you are interested in).

Ask Vanguard if there are gotchas & terminology warnings. For example, the annuity company might cut your mother a check if they hear "lump sum" & think you are closing the IRA.

Find out from Vanguard how the ira should be titled coming in & how they will be able to associate it with her existing IRA. I don't think it should be titled as an "inherited IRA", but since spousal they may be able to handle it. It may be best to let Vanguard initiate/handle the transfer once you get to that point. Both companies will likely have paperwork.

After it is transferred, it would be advisable to verify that Vanguard knows not to do another RMD. I actually expect they would insist that happen before transfer. Certainly hope this "merge" of 2 IRAs can be completed by end of year & so going forward RMDs won't be an issue.

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Re: Mom inheriting variable annuity within IRA from Dad

Post by FoolStreet » Sat Aug 10, 2019 6:29 pm

ldebhaar wrote:
Sat Aug 10, 2019 4:15 pm
The policy lists the death benefit as just over $374,000. I don't know how this will be paid out, if it will be as cash within the IRA or within the variable annuity. I was going to call Monday to ask some questions. I want to help my mom get this right, so we don't want to make any moves until we have more information. I started helping my parents with their finances in the past few years. Dad had been talked into this variable annuity in 2009. I wanted to have him get rid of the policy but after evaluating the terms and realizing he was likely going to pass away this year, we decided to keep it in order for my mom to get the higher value of the death benefit. My mom does not need an income stream and the fees are quite high for this annuity. Since my dad has had it since 2009 there is a minimal surrender charge ($30). However I don't know about fees charged to rollover, etc. Good questions for me to ask.
To repeat Celia’s point, because it bears repeating, call the corporate customer support number. Do not call the name of the individual listed on the last statement because that person is a salesperson.

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Stinky
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Re: Mom inheriting variable annuity within IRA from Dad

Post by Stinky » Sat Aug 10, 2019 7:51 pm

ldebhaar wrote:
Sat Aug 10, 2019 4:15 pm
The policy lists the death benefit as just over $374,000. I don't know how this will be paid out, if it will be as cash within the IRA or within the variable annuity.


I would think that death benefit would be outside the VA, but that your mom will have options to keep it tax deferred.


I was going to call Monday to ask some questions. I want to help my mom get this right, so we don't want to make any moves until we have more information.

It’s good that your mother has you to help her through this. You should be in no hurry; take the time to get it right.


I started helping my parents with their finances in the past few years. Dad had been talked into this variable annuity in 2009. I wanted to have him get rid of the policy but after evaluating the terms and realizing he was likely going to pass away this year, we decided to keep it in order for my mom to get the higher value of the death benefit.

Your father was sold a horrible product - a VA inside an IRA. Don’t ever deal with the salesman; he’s likely to try to sell you something else.

You did exactly the right thing in keeping the product long enough to collect the death benefit.


My mom does not need an income stream and the fees are quite high for this annuity. Since my dad has had it since 2009 there is a minimal surrender charge ($30). However I don't know about fees charged to rollover, etc. Good questions for me to ask.

i hope that there are no surrender charges, because this is a death claim, not a surrender. There could be a charge to rollover the IRA.
Please let the Board know how this turns out.
It's a GREAT day to be alive - Travis Tritt

Topic Author
ldebhaar
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Re: Mom inheriting variable annuity within IRA from Dad

Post by ldebhaar » Tue Aug 13, 2019 8:05 am

Thank you all for your condolences and your great advice. I appreciate the recommendation to try to talk to corporate rather than a salesperson about some of these questions. I will continue to update this post as I get more information. Thanks for your help!

OP

Alan S.
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Re: Mom inheriting variable annuity within IRA from Dad

Post by Alan S. » Wed Aug 14, 2019 1:56 pm

ldebhaar wrote:
Sat Aug 10, 2019 4:15 pm
The policy lists the death benefit as just over $374,000. I don't know how this will be paid out, if it will be as cash within the IRA or within the variable annuity. I was going to call Monday to ask some questions. I want to help my mom get this right, so we don't want to make any moves until we have more information. I started helping my parents with their finances in the past few years. Dad had been talked into this variable annuity in 2009. I wanted to have him get rid of the policy but after evaluating the terms and realizing he was likely going to pass away this year, we decided to keep it in order for my mom to get the higher value of the death benefit. My mom does not need an income stream and the fees are quite high for this annuity. Since my dad has had it since 2009 there is a minimal surrender charge ($30). However I don't know about fees charged to rollover, etc. Good questions for me to ask.
2009 marked the bottom of the financial crisis. This is when insurance companies discovered that variable annuity death benefits had been massively underpriced as the losses incurred by 2009 left many of these accounts with death benefits much higher than the market value. These death benefits had mostly been financed by purchasing reinsurance from other life companies, so it is more accurate to state that these reinsurers took the brunt of losses paid to beneficiaries of these annuities, who received a windfall compared to standard investments that had lost over half their value. Reinsurance premiums then sky rocketed as a result and the costs were passed on to VA buyers in the form of higher fees for both basic death benefits based on premiums paid in (less distributions) and for so called enhanced death benefits. Now a VA purchased in 2009 seemed very attractive after the meltdown, and if invested in equities should now have a market value about 4x the premium paid in 2009 if no distributions were taken. This particular annuity has a death benefit value of only 1.5x the market value, so that indicates the drain of these higher fees as well as the sub accounts chosen to invest in. Perhaps only a portion was in equities, but bonds did pretty well too for the earlier portion of the 10 year period. It would be nice to see some documentation of how the death benefit and market values were determined. Prior statements might provide some of this data if retained.

In addition, for many of these annuities, the insurance company must determine the annual RMD by using a value reflecting certain fringe benefits rather than simply the market value at the end of each year. That would make the RMD including the 2019 RMD higher than that of your typical IRA account with the same market value. That might explain the amount of the 2019 RMD distribution in May if it was higher than the RMD calculated using just the 12/31/2018 market value.

Most likely, your original plan is wise. Have a direct transfer of the death benefit proceeds pulled over by her IRA custodian and then invest it in a diversified portfolio of low cost investments. It does not matter if the proceeds transfer as an inherited IRA or an owned IRA after assuming ownership, but since the one rollover limitation in a 12 month period applies to spousal rollovers in addition to what the surviving spouse might have done with their own IRAs, it is advisable to move the funds by direct transfer (not reported on a 1099R).

fposte
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Re: Mom inheriting variable annuity within IRA from Dad

Post by fposte » Wed Aug 14, 2019 2:10 pm

For a data point, I inherited a similar product from my father, and it had a significant surrender fee. Nonetheless, when I ran the numbers, 5-6 years, which was much earlier than the expiry of the contract, would be enough for the lower costs of a diversified portfolio at Vanguard to recoup the surrender fee, so I went ahead and cashed the annuity out. Sometimes it's worth just paying the up-front costs.

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Re: Mom inheriting variable annuity within IRA from Dad

Post by FoolStreet » Wed Aug 14, 2019 3:16 pm

fposte wrote:
Wed Aug 14, 2019 2:10 pm
For a data point, I inherited a similar product from my father, and it had a significant surrender fee. Nonetheless, when I ran the numbers, 5-6 years, which was much earlier than the expiry of the contract, would be enough for the lower costs of a diversified portfolio at Vanguard to recoup the surrender fee, so I went ahead and cashed the annuity out. Sometimes it's worth just paying the up-front costs.
First, my condolences on the loss of your father.

I guess I'm confused. How do you inherit an annuity like this? I assumed that it would simply have a death benefit paid out in cash and that's that. Does the salesperson try to get the heir to use the cash to purchase a new annuity contract?

fposte
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Re: Mom inheriting variable annuity within IRA from Dad

Post by fposte » Wed Aug 14, 2019 3:27 pm

FoolStreet wrote:
Wed Aug 14, 2019 3:16 pm
fposte wrote:
Wed Aug 14, 2019 2:10 pm
For a data point, I inherited a similar product from my father, and it had a significant surrender fee. Nonetheless, when I ran the numbers, 5-6 years, which was much earlier than the expiry of the contract, would be enough for the lower costs of a diversified portfolio at Vanguard to recoup the surrender fee, so I went ahead and cashed the annuity out. Sometimes it's worth just paying the up-front costs.
First, my condolences on the loss of your father.

I guess I'm confused. How do you inherit an annuity like this? I assumed that it would simply have a death benefit paid out in cash and that's that. Does the salesperson try to get the heir to use the cash to purchase a new annuity contract?
It's going back a few years for me (though the condolences are still appreciated), but I'm pretty sure his had no death-benefit provision. He had separate life insurance and I suspect was sold the annuity as additional protection (additional profit for the salesman, anyway) within an IRA.

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Re: Mom inheriting variable annuity within IRA from Dad

Post by not4me » Thu Aug 15, 2019 7:24 am

FoolStreet wrote:
Wed Aug 14, 2019 3:16 pm
Does the salesperson try to get the heir to use the cash to purchase a new annuity contract?
My experience has been what you described. The company has products to sell & you happen to have cash, an account there, and possibly in an emotional state that doesn't lend itself to clear thinking. Especially if the deceased is seen by the heir as financially more astute than them. It isn't always another annuity. They'll also suggest a cash management approach, etc that delays the payout & gives more time for them to have a shot.

BTW, the advice to "call corporate" isn't likely to change things...corporate wants sales as well. The larger companies have claims departments & many have necessary forms on their web page. Again from my experience, working with them & clearly being ready to transfer helps minimize the sales pressure. It is also true that these may have been sold by a 3rd party...such as an "full service" broker. If so & they were still involved, the heir can get them to be an intermediary. Or use, in this case, Vanguard to initiate the transfer.

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ldebhaar
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Re: Mom inheriting variable annuity within IRA from Dad

Post by ldebhaar » Tue Aug 20, 2019 7:45 am

OP- so far I've gathered that Vanguard can't make the transfer happen until dad's account has been changed to mom's name. Vanguard recommended going through the other company (which is MetLife/now Brighthouse Financial) first. So we are waiting on paperwork from Brighthouse to see how to proceed. We still have to figure out how the payout for the death benefit works. Hopefully once the benefit is paid out the annuity is cancelled and that is done. Then we can put the IRA in mom's name and do a rollover to Vanguard. Seems like it should be simple but I'm sure it will have some complications.

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