Advanced Underwriting Consultants

Question of the Day – May 9

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

Question:  My client wants to transfer his nonqualified deferral annuity (NQDA) to his revocable trust.  Is that allowed, and is it a taxable event?

Answer:  The transfer of an annuity to a revocable trust is permitted under the tax rules, so long as the annuitant is a real person.

The annuity company may have its own rules about transfers and ownership, so it’s smart to double-check with the carrier.  For example, the insurance company may consider a transfer of that type to be a surrender of the existing policy and purchase of a new one—potentially causing the client to deal with surrender charges.

Most revocable trusts are treated as the alter-ego of the trust creator—the grantor—for income tax purposes.  The IRS says that if the grantor effectively transfers an asset to himself, the transfer will not trigger any kind of tax consequence.

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 – March 14

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Here’s the question of the day.

Question:  Are taxable distributions from a non-qualified deferred annuity subject to the Tennessee state income tax (Hall tax)?

Answer:   Yes.  Dividend and interest income in Tennessee is generally subject to the Hall tax.  Such income in excess of a small exemption amount is taxed at a flat rate of 6 percent.

The instructions to the Tennessee income tax return lists the type of income that is subject to the tax:

Taxable Income….

3. Any distribution which does not qualify as a return of capital and is otherwise taxable. (Emphasis added.)  In order to qualify as a return of capital, it must be shown that part of the shareholder’s investment is being returned to the shareholder and that, as a result, the capital of the company is actually reduced.

See http://www.state.tn.us/revenue/forms/indinc/inc250.pdf.

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 – November 1

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 is the beneficiary of a non-qualified deferred annuity (NQDA) inherited from her mother in 2008.  The client has not yet taken any distributions from the inherited account.  What are her RMD obligations?

Answer:  The non-spouse beneficiary of an NQDA generally has two options for taking distributions from the inherited account.  The first is that the beneficiary may take annual distributions based on the beneficiary’s life expectancy beginning in the year after the original owner died.

If that method is not chosen, the beneficiary must take a complete distribution of the account before the end of the fifth year after the original owner’s death.

It appears that the IRS will allow a tax-free transfer of an inherited NQDA to another NQDA account.  However, the new account is still subject to the RMD rules described above.

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.