AQuest’s – LPL Advisor Bob Stockoski discusses your options when you inherit an annuity. There are a lot of things to consider especially from a tax-free point of view.

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Inheriting an annuity from a loved one can be a great way to secure your financial future, but it can also come with significant tax implications. Fortunately, there are some strategies you can take advantage of to minimize the amount of taxes you have to pay when you inherit an annuity. In this article, we will go over some of the best ways to inherit annuities tax-free.

1. Spousal Transfer

If you are the surviving spouse of the annuity owner, you may be able to transfer the annuity into your name tax-free. This is known as a spousal transfer and it allows you to take over the annuity without having to pay taxes on the funds. Once the annuity is in your name, you will begin receiving payments according to the schedule outlined in the contract.

2. Non-Qualified Annuities

Non-qualified annuities are annuities that were purchased with after-tax dollars. When you inherit a non-qualified annuity, you will only have to pay taxes on the earnings, not the entire amount of the annuity. This means that you can avoid paying taxes on a portion of the annuity if the original owner had already paid taxes on it.

3. IRA Annuities

If the annuity is part of an IRA, you will need to follow specific rules to avoid paying taxes. First, you will need to open an inherited IRA account and transfer the funds from the annuity into it. From there, you will be required to take required minimum distributions (RMDs) based on your life expectancy. These distributions will be subject to income taxes, but you can minimize the tax burden by spreading the distributions out over a longer period of time.

4. Charitable Donations

Another option for avoiding taxes on inherited annuities is to make a charitable donation of some or all of the funds. When you donate the funds to a qualified charity, you can receive a tax deduction for the donation, effectively reducing your tax burden. Additionally, the charity can receive the full amount of the annuity, which can be a great way to support a cause you care about.

5. Estate Planning

Finally, proper estate planning can help you avoid taxes on inherited annuities. You may be able to set up a trust that will receive the annuity payments, which can help you control how the funds are distributed and potentially reduce taxes. Additionally, you can name multiple beneficiaries to the annuity, which can help you spread out the tax burden between several people.

In conclusion, inheriting an annuity can be a great way to secure your financial future, but it can also come with tax implications. By following the strategies outlined above, you can minimize the amount of taxes you have to pay when you inherit an annuity and keep more of the funds for yourself. As with any financial decision, it’s always recommended to consult with a financial advisor or tax professional to weigh your options and make informed decisions.