Want to learn the best ways to leave money to heirs? This guide will provide tax strategies to minimize or avoid paying taxes on an inherited annuity, 401k, and IRA. In addition, it’ll include methods for the insured providing the inheritance and the beneficiary to receive inheritance money. These tax strategies are perfect for:
- High-income earners and high net worth individuals
- Annuity owners that plan to leave the funds to heirs.
- Consumers with current or prior health issues, wanting life insurance coverage.
- Seniors up to age 85 wanting life insurance, paid in a single payment.
- Consumers wanting to avoid taxes on RMD.
For the insured wanting to leave money to heirs.
Here are a few tips if you’re researching ways to pro-actively want to leave your beneficiaries’ inheritance and reduce their tax burden. These strategies apply to qualified retirement plans such as a 401k or IRA and your annuity accounts.
Note* If you are healthy, purchase life insurance first, then consider these tax strategies.
Annuities with Enhanced Death Benefits
Some annuities offer a life insurance alternative called Enhanced Death Benefits. These benefits are designed to maximize a death benefit without the medical underwriting required with applying for life insurance.
By utilizing these enhanced death benefits, your heirs would either
- spread the tax burden over time,
- pay fewer taxes overall, or
- completely cover their tax bill.
Life Insurance-Annuity Hybrid Plans
A life insurance annuity hybrid plan is designed for asset transfer using non-qualified deferred annuities with a low tax basis or qualified retirement plans.
The plan consists of two contracts, a temporary Single Premium Immediate Annuity (SPIA) and Single-Premium Life Insurance Policy.
Converting Annuities, 401k, and IRA to Life Insurance
The payments from the SPIA will go directly to the life insurance policy. This process lets the insured spread the taxable income in the funds used to purchase the SPIA over a 5,7, or 10 year payment period. The result is leaving a tax-free death benefit for your beneficiaries.
These hybrid plans also can fulfill RMD’s for your IRA or 401(k) as well.
The life insurance coverage is guaranteed on Day 1 and will not lapse as long as the hybrid plan is not canceled.
Some life insurance annuity plans will offer both the tax-free life insurance proceeds and the remaining payouts if the insured dies before the payout duration ends.
The Application Process
- Request a quote.
- Submit an application and health questionnaire.
- Conduct a 20-minute phone interview with a medical underwriting team.
- Wait up to 48 hours for approval. Typically, the approval rate is high; the decline rate is low.
- If approved for life insurance coverage, transfer the funds.
- Each year you’ll receive a 1099 form to report the SPIA payment to the IRS.
The Beneficiary Perspective
The Surviving Spouse
If a surviving spouse recently inherited an annuity, they can either pay taxes on all of the funds now, spread the tax payment over time, or exercise the spousal continuation provision. Spousal continuation is the tax strategy to avoid paying taxes now.
If a non-spousal beneficiary inherits money, an annuity, or a qualified retirement plan without the benefits mentioned, they can utilize a bonus annuity to help offset the tax burden.
- Annuitant vs. Beneficiary: What’s The Difference?
- Primary vs. Contingent Beneficiary: What’s the Difference?
- What Happens To A 401K When You Die?
- Inherited Annuities: What Are My Options?
- Annuities that offer a Death Benefit to Beneficiaries
- The Complete Annuity Death Benefit Guide
- The Best Annuity Death Benefits
- What is Spousal Continuance?
- How to Retire on $200,000 Inheritance
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