Advanced Underwriting Consultants

Question of the Day – September 27

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client recently passed away.  The client was receiving payments under a period certain immediate annuity.  Is the annuity included in the client’s estate for estate tax purposes?

Answer: Yes.

If an immediate annuity contains a refund or period certain feature, the post-death payments are includable in the gross estate for federal estate tax purposes under Revenue Code Section 2033 if payable to the estate, or Revenue Code Section 2039 if payable to a named beneficiary.  Where the death benefit is payable as periodic payments over some time period, the present value of the remaining payments is included.  Present value is determined by reference to IRS regulations and applying its relevant discount rate.

The same Revenue Code Sections reach the annuity death benefit paid when death occurs prior to annuity starting date.  Where the death benefit is paid in a lump-sum, that figure is included in the gross estate.

In case of a joint and survivor annuity purchased with the decedent’s premium payment, the value included in the gross estate will be an amount equal to the premium an insurance company would charge on the date of death for an identical single life annuity on the survivor.  Of course, remaining payments to a surviving spouse might qualify for the unlimited marital deduction.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 25

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Here’s the question of the day.

Question: I have a client who has been receiving “substantially equal payments” from her IRA since she has been age 50.  I am proposing setting her up in an immediate annuity with part of her IRA that will pay her the exact same amount she is getting now for a 5 year period which will take her beyond age 59 1/2.  Will this still qualify under the “substantially equal payments” rule?

Answer: There’s not a 100% certain answer to the question, unfortunately.

The proposed action makes logical sense, and seems consistent with the spirit of the 72(t) “substantially equal series of payments based on life expectancy” exception.  However, there is some troubling language in Revenue Ruling 2002-62, which the IRS could apply to the situation in an adverse way.

Here’s the language from the Revenue Ruling:

a modification to the series of payments will occur if, after such date, there is

(i)              any addition to the account balance other than gains or losses,

(ii)            any nontaxable transfer of a portion of the account balance to another retirement plan, or

(iii)      a rollover by the taxpayer of the amount received resulting in such amount not being taxable.

An annuitization of a portion of the account might be considered a “nontaxable transfer of a portion of the account balance,” invalidating the entire set of 72(t) distributions.  It’s not clear that the IRS would decide that way, but we can’t predict for sure.

The only way to get a sure opinion is for the client to ask for a private letter ruling.  The second best way is for the client’s CPA to think over the issues, review my analysis above, and decide that the CPA is comfortable with the client taking the tax risk.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 7

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Here’s the question of the day.

Question: If an insurance company fails, does the guaranty fund of the insurance company’s domicile or the guaranty fund of the policy owner’s state of residence kick in?

 

Answer: Each state has its own system for guaranteeing the life insurance products and annuity contracts of a failed life company.  In general, each state’s system will provide limited protection for the owner of a life or annuity contract issued by a carrier that is no longer able to meet its obligations.

 

Financial and insurance professionals may not tell their prospective clients about state guaranty funds (SGFs)—at least as any kind of solicitation to purchase insurance.  While each state has its own version of law prohibited using SGF information with clients, each of them does have such a law.  New York’s law is typical.

For policyowners of an insolvent company licensed to do business in the policyowner’s state of residence, the state of residence will provide the guaranty.  Policyholders who reside in states where the insolvent insurer was not licensed to do business are usually covered by the guaranty association of the company’s home state.

The National Organization of Life & Health Insurance Guaranty Associations is a gateway for additional information about state life and health guaranty rules.  Their website is at www.nolhga.com.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.