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Real World Scenarios: Death Benefit Annuity Taxes


Our series of Real World Scenarios continues with a future inheritant’s question regarding their father’s death benefit annuity.

My elderly father has an annuity. When he passes away, will I be taxed only on the gain, or will I be taxed on the entire amount?

If your father dies his heirs are taxed on everything above his initial cost basis. For example, if he initially invested $100,000 in a non-qualified plan that has grown to $250,000 by the time of his death, you and any other heirs would pay taxes on the $150,000 gain as it is withdrawn. If the annuity is in an IRA or other qualified plan, there is no cost basis; the annuity will be taxed in its entirety as money is withdrawn.

In most cases the taxes can be taken in a lump sum, or spread out over five years. If an election is made in the first year following his passing, you can select any type of payout period — for example, you could choose for the annuity to be paid out over the rest of your life, so that you would have a lifetime income stream. If you want to discuss in person with an licensed financial professional, please do not hesitate to contact an Annuity FYI expert for more information.

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