Annuities are great retirement planning vehicles but there are potential problems to be considered. When funds are withdrawn, which most often occurs upon the death of the annuitant/owner, that the surprise occurs.
A deferred annuity is the only asset you can own that does not get a “step-up in basis” at the time of your death. It is quite common today to see real estate and stocks that have been owned for years and that have appreciated ten fold to a hundred fold be passed on to heirs upon the death of the owner with no income tax whatsoever. But an annuity does not enjoy this tax feature. Specifically excluded from the step-up in basis rule, the entire gain in the annuity is subject to income tax when received by the beneficiary. OUCH!
Since a vast majority of the $Billions now residing in annuities is destined to be passed on to the children of the annuitants, the tax bills will come as a tremendous shock to all concerned. In fact, it is not uncommon to see proceeds from an annuity that has been accumulated and tax deferred in a relatively low tax bracket (15% or 20%), incur taxes of 33% or more when added to the existing income of the beneficiary. This clearly was not the intent of the contract owner. But it occurred because of the failure to recognize the ultimate purpose for the money on deposit in the annuity and to choose the most appropriate strategy. Call us today for strategies to avoid this pain 336-226-8595.
