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Small inherited annuity - 5 year, or lifetime payouts?
Old 07-12-2018, 08:17 AM   #1
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Small inherited annuity - 5 year, or lifetime payouts?

Payments would be income (no step-up in basis) to beneficiary so ruled out lump sum.



Any reason to favor one or the other? By small I am thinking 50-60K. (This is hypothetical for now so best I can do on numbers).
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Old 07-12-2018, 08:30 AM   #2
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would you have the discipline to invest the inheritance and NOT spend it ( only say half the interest/dividends , not the actual inheritance , EVER )

if YES i would probably go for the 5 years , and learn how to invest wisely ,
if you are unsure , the lifetime payouts might be better for you

cheers !!!
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Old 07-12-2018, 08:34 AM   #3
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Tax rates may go back up, so lifetime payout may result in paying a higher percentage in taxes.
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Old 07-12-2018, 08:41 AM   #4
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Spending it never crossed my mind actually. I was bummed to find it would be taxable and just thinking about otpimizing that.
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Old 07-12-2018, 08:55 AM   #5
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Crank up Excel, look at NPV of various scenarios of rates of return and dates of death. Compare to 5 year payoff NPV.

Given the odds that fees are high, the shorter payout may be beneficial since you are exposed to the fees for a shorter time. A lump sum might be better yet if that option is available. But the vendor aka adversary knows all this too.
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Old 07-12-2018, 09:01 AM   #6
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Quote:
Originally Posted by badatmath View Post
Payments would be income (no step-up in basis) to beneficiary so ruled out lump sum.

Any reason to favor one or the other? By small I am thinking 50-60K. (This is hypothetical for now so best I can do on numbers).
It would depend (almost) solely on the math.

How much would the lump sum be?
How much would the payments from the 5-year option be?
How much would the lifetime payments be?
What is the recipient's current tax bracket?
What is the recipient's age and expected lifetime?

The only other factor that comes to mind is that the current (generally lower) income tax rates are temporary and due to expire in 2025.
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Old 07-12-2018, 09:08 AM   #7
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Spending it never crossed my mind actually. I was bummed to find it would be taxable and just thinking about otpimizing that.
sorry i had to ask the question

but i had several friends ( now decreased ) that would have 'partied' all that away in 5 years and THEN realized thet could have bought a car ( or bike )

how about the invest wisely part then ??


FIRST you need a reliable calculator and a skeptical attitude

you CAN do it , but it probably won't be easy ( i have probably used up half the luck in the universe already )

i live in Australia my tax knowledge is worthless in the US

cheers !!
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Old 07-12-2018, 09:39 AM   #8
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According to the statement below, only the gain is taxable. A non-qualified annuity is one that is not part of an employer plan.

Taxation

Unlike other investments, the named beneficiary of a nonqualified annuity does not get a step-up in tax basis to the date of death. However, that doesn't mean the beneficiary will have to pay taxes on the full amount. Because the purchaser of the annuity made the investment with after-tax dollars, only the amount attributable to investment income is taxed, but it will be taxed as ordinary income and not enjoy any special capital gains treatment. When there is a death benefit that exceeds the value of the account, that additional amount is also taxed as ordinary income. Beneficiaries are not subject to the 10 percent early distribution penalty that applies to distributions before the annuity owner reaches age 59 1/2.
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