Non-Qualified Variable Annuity Tax Implications

[bpgdeg1234]

Thanks in advance for any potential guidance. My FIL is in a nursing home and my spouse is his POA. We have come across a few non-qualified variable annuities he contracted for back in the 90's that have increased in value over the years. We are not that well-versed in all the workings of variable annuities other than what we read on a couple of online sites and haven't been able to talk to the firms yet as waiting for POA forms to be approved before they'll talk to us on any of his account specifics.

One question we have is that two contract statements for two different non-qualified variable annuity contracts indicate a current contract surrender amount and also a 2024 annuity commencement date. So far my FIL hasn't taken any payouts from any of the annuities and he will be age 90 at the annuity commencement date. As such, we are trying to understand what happens with the payout if we don't surrender the contract and he lives to the 2024 commencement date.

Does the variable annuity contract payout typically become a lump sum at that point and taxed as ordinary income less the initial contract purchase price or can he still take annuity payments even at that age of 90 over the estimated remaining life expectancy which I'm not sure how they determine that since he would be beyond the normal life expectancy of a male at that point?

Also, if he doesn't surrender the contract but were to pass before the 2024 annuity commencement date is it correct that each of the individual beneficiaries have the option to choose with their portion of the contract either a lump sum payout which would be taxed as ordinary income less their portion of the contract basis, or an annuity payout over 5 years in a similar fashion or over the individual beneficiary life expectancy if he or she so chooses? Any information in general that could be of assistance would be greatly appreciated. Thanks once again.

 

[bpgdeg1234]

bump any takers? Thanks

 

[fosterscik]

You need to get copies of the original annuity documents. They will detail what happens. I have a annuity that may provide insight, but you really need to see the original documents...
In my case these are the important clauses (shortened):

"If the annuitant does not elect one of the options prior to 75, benefits will be paid by the 2nd option, life annuity 10 yr certain".

"In the absence of an election, the annuity date shall be the first day of the month in which the annuitant attains age 75".

"There is no charge for surrender if the contract has been in force for 15 years or longer"

"Payments can be made monthly for a selected number of years. The number of years may be between 3 and 15. At any time the Annuitant may elect to receive in one sum the present value of the remaining payments computed at an interest rate of 3.5% per annum"

I haven't decided what to do with mine, but will certainly wait until at least 70 (because I'm Roth converting tIRAs and want to minimize income. At age 70 I will probably annuitize (joint life), but that will depend upon my health at that point. In your case, I'm amazed the annuity is still accruing funds and has not annuitized yet. I would imagine there is a lump sum option (but that would be taxable and not great if appeared in a single tax year). I'd look for a xx-year certain payout with a named benficiary.

 

[Souschef]

We have one of those, but I am not sure of your wording on the 2024 commencement date. Do you mean the maturity date?
The one we have matures in 2025, and we have the option of collecting the money or rolling it over. We have opted not to take annual payments since fortunately, we do not need the money.
You have to look at the tax angle. The lump sum may push him into a higher bracket. You may want to take a yearly distribution without penalty. In any event any funds (less a portion of the contribution) coming from the annuity are taxed at regular income rates.

 

[bpgdeg1234]

Thanks for your replies as much appreciated.

We will learn more once the POA's get approved and they send us a copy of the initial contracts. "Your Annuity Commencement Date" is xx/2024and is what is indicated on the statement we received which I assume to be the date that annuity payments would begin or potentially roll over again to new date, etc.

Why it is when he turns 90 is beyond me but will find out once can look at the contracts and get any questions answered.

 

[phil1ben]

We are in a similar position with my inlaws (84 years old) who requested "some help". We found that for some reason they purchased 5 separate non-qualified annuities many years ago. Here is what we did:

1. Found all the annuity contracts.
2. Contacted each annuity company with the inlaws on the telephone to determine the status of each annuity. As long as my inlaws were on the telephone each of the companies were very helpful. Have patience we were on hold for a long time.
3. Confirmed that the beneficiaries on the annuities were properly identified.
4. We made sure that a copy of all notices/statements concerning the annuities are now sent to my inlaws AND MY WIFE.

My inlaws are very nice but not highly educated or knowledgeable about financial instruments. In effect, they bought these annuities from the son of a friend or someone they met at the gym not understanding their terms.

As much as I hate annuities (and I truly do), in hindsight they worked out ok for them. Sure they would have done better in an index fund or properly allocated basket of mutual funds but they would not have done that. Nevertheless, the annuities grew (subject to very high fees and commissions) substantially during the last 20-25 years.

Lastly, understand that typically when you withdraw money from an annuity over time the annuity company first disburses all income (so the entire monthly payment is subject to taxation) and only disburses principal when the income is completely disbursed. You may want to confirm that this is the case with the annuities that you found yourself reviewing.

Did I forget to mention that my wife has three other sisters (in different financial circumstances) and we will all need to address these annuities together when the time comes.

Good Luck!

 

[bpgdeg1234]

We are in a similar position with my inlaws (84 years old) who requested "some help". We found that for some reason they purchased 5 separate non-qualified annuities many years ago. Here is what we did:

1. Found all the annuity contracts.
2. Contacted each annuity company with the inlaws on the telephone to determine the status of each annuity. As long as my inlaws were on the telephone each of the companies were very helpful. Have patience we were on hold for a long time.
3. Confirmed that the beneficiaries on the annuities were properly identified.
4. We made sure that a copy of all notices/statements concerning the annuities are now sent to my inlaws AND MY WIFE.

My inlaws are very nice but not highly educated or knowledgeable about financial instruments. In effect, they bought these annuities from the son of a friend or someone they met at the gym not understanding their terms.

As much as I hate annuities (and I truly do), in hindsight they worked out ok for them. Sure they would have done better in an index fund or properly allocated basket of mutual funds but they would not have done that. Nevertheless, the annuities grew (subject to very high fees and commissions) substantially during the last 20-25 years.

Lastly, understand that typically when you withdraw money from an annuity over time the annuity company first disburses all income (so the entire monthly payment is subject to taxation) and only disburses principal when the income is completely disbursed. You may want to confirm that this is the case with the annuities that you found yourself reviewing.

Did I forget to mention that my wife has three other sisters (in different financial circumstances) and we will all need to address these annuities together when the time comes.

Good Luck!

Excellent points and I did read about disbursements first being all taxable income with the non-taxable basis being subsequently disbursed. Once we get these POAs in place we have a lot to review and need to immediately confirm the listed beneficiaries are correct.

Thanks again for your and everyone's input.