Tags
Annuity, Annuity Claim Statement, Beneficiary, Certified Death Certificate, Claims, decedent, Estate as Beneficiary, SEP-IRA, Traditional IRA
While wrapping up work on the traditional IRA, closing the annuity was next on the administration plan. The annuity was kind of mysterious because I never found the policy. Earlier in the administration, while in the interim, I did find distribution statements for the annuity, which described the annuity as a Flexible Premium Deferred Annuity – (SEP-IRA). So, I assumed the decedent – who was self-employed – used the annuity as a retirement plan, which would classify the annuity as a qualified annuity. However, since I had limited knowledge of annuities, a call to the insurance company was necessary.
Distribution Options
Before I called the insurance company, I wanted to check some facts about the annuity and the estate. At this point, this is what I knew:
- The estate had twenty beneficiaries.
- The assumption that the annuity lacked designated beneficiaries.
- Based on the last statement, the annuity was worth a little over two thousand dollars.
- The distribution in the will wasn’t in equal shares.
- The annuity served as the decedent’s SEP-IRA, but was still an annuity.
- The treatment of a SEP-IRA is similar to a traditional IRA when the estate is the beneficiary.
After contemplating the above facts, I thought taking the lump-sum distribution was the best option. Basically, for similar reasons outlined in the article Closing the Traditional IRA: What Options?, there were too many beneficiaries and not enough money to make numerous transfers reasonable. So, when I called the insurance company, I asked the representative, “Can you tell me if there are any beneficiaries associated with the annuity? Also, what do I need to do to close out the annuity?”
The representative replied, “I can’t tell you anything about the annuity without documentation proving you are the executor. However, to get the process started, I will mail you the benefit claim package with all the instructions you need to fill out the claim form and the documents you need to provide.”
About a week after the call, the benefit claim package arrived.
Closing the Annuity
In mid-December 2012, the benefit claim package arrived and I went through it. After reviewing the instructions, I thought closing the annuity was a very simple process. The process of closing the annuity consisted of the following:
- Have the representative of the estate fill out and sign the claim form.
- If there are beneficiaries, have them fill out and sign the Annuity Claimant Statement.
- Have the representative enclose the Letters of Testamentary proving their authority to represent the estate.
- Enclose an original Certified Death Certificate.
Since assuming there weren’t any beneficiaries designated for the annuity, the three remaining steps were easy to complete. So, I quickly completed the package and mailed to the insurance company that same day. After a week went by, a letter arrived from the insurance company. The letter mentioned there was a beneficiary named that pre-deceased the decedent. Therefore, a copy of the death certificate for the deceased spouse was necessary to close the annuity. Fortunately, the decedent served as the executor for the estate of his spouse and I had the copy of the death certificate in the office. So, I mailed the death certificate that same day. Around two weeks later, the check arrived in the name of the estate. After depositing the check in the estate account, the task of closing the annuity came to an end.
Conclusion
In the end, closing the annuity was a simple process. However, an executor should never have to take part in such a process. By simply designating a beneficiary to the annuity, the beneficiary would have handled the process saving the estate taxable income and the cost of probate. So, because of poor estate planning, the costs to the estate continue to grow and the executor is doing more work than necessary.
Recommended Reading
Since SEP-IRA’s are similar to traditional IRA’s, read the article Inherited Traditional IRA: Distribution Rules for Estate as Beneficiary for insight on the distribution rules.
Do you think I made the right decision in taking the lump-sum distribution given the circumstances? Did you find this article helpful? Share your comments and questions in the comment area below.
Enormously helpful. Similar to Jim in another post, my folks of 86 and 89 passed away within 5 days of eachother and both had annuity contracts. Dad listed mom as the primary beneficiary, and mom listed dad as her primary beneficiary……and no secondary beneficiaries were noted (mistake), so both contracts go to my mom’s estate.
Per my tax guy, estate taxes are at 37% after just $14,450 of taxable income, so we will for sure distribute the annuity claim proceeds and income to the beneficiaries from the estate thru IRS Form K-1. My mom’s annuity was a qualified annuity and she was receiving RMD’s, so we are leaning towards talking a lumpsum distribution vs. filing yearly estate tax returns and K-1 forms. My dad’s annuity was a non-qualified annuity, but the taxable portion is fairly small, so not much value in deferring the distribution and having to assure tax returns and K-1 forms in a future year. Also, in this election year, and with an enormous federal deficit, there is always the risk that tax rates will jump higher in 2025 and future years than they are now.
Fortunately, just these two annuities and some small life insurance proceeds are the only assets within the estate, so my mom’s estate can go through the state’s “simple” probate (still no cake walk). Other larger annuities had secondary beneficiaries listed, so the distributions will go strait to those beneficiaries without hitting probate.
I am the Executrix of my Dad and Stepmother’s estate. Both of them passed away within an hour of each other on September 8th of 2021. My Dad had an annuity, my stepmom was the beneficiary, but now it goes into the estate. My question is as follows: Should I have taxes pulled out now, or wait until the taxes are completed on the estate?
Hello Sheila,
Thank you for your question. Since the annuity goes to the estate, you will most likely have to file a federal estate income tax return. Furthermore, if your state assesses an income tax, you will most likely have to file a state estate income tax return. Of course, I am making the assumption that the annuity is worth over $600.00, which is the threshold to filing estate income tax return for federal. The returns are due one year and four months after the date of death and may include other forms of income such as dividends, interest, rent etc that was paid to the estate. So, I would wait until you settle as much of the estate before the deadline and capture all the income to the estate before I file the returns. Typically, depending on the size of the estate, you should have the estate settled within a year, so it wouldn’t be a problem.
In my experience, the CPA I hired recommended doing two sets of returns. The first set would be for income received for the year from the date of death. The second set would be for the income received after one year from the date of death, if necessary. The second set was necessary as some income trickled into the estate after the one year anniversary that exceeded $600.00.
I hope this answers your question.
Robert
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I am happy to hear that the article was of some help to you. Thank you for your comment.