22 November 2013 0 Comments

A Tax Time Bomb!

tax time!Several years ago you placed $50,000 into a deferred annuity.  You are now age 71 and that annuity’s value has grown to $75,000. As a widower you plan to leave the cash from this annuity to your grandson when you die.  You have plenty of other assets and a comfortable income. This is money you won’t need during your lifetime, so you have named your grandson as beneficiary.

He’s about to graduate from college and you know this money will pass directly to him, bypassing probate, and it is something that he will remember you for.

This is a lovely thing to do, but there might be a better way to do it.  Since you have never paid income tax on the annuity’s gain, when you die, your grandson will be hit with state and federal income tax on the gain.  This means, that if you were to die tomorrow, the IRS would tax your grandson for the $25,000 gain.  Since you are in good health, it is more likely that you will not die for several years.  In another 15 years, if the annuity continued to earn 3% per year its value would be $116,847, so your grandson would be hit with tax on the $66,847 gain.  Who knows what the tax rates will be then or how much other income he will be earning, but it is likely that at least $23,396 will be lost to state and federal taxes (35% of $66,847).

On top of this, if you happen to have a total estate that exceeds the Federal Estate tax exemption, another 40% of the total annuity value could be lost, bringing the total tax on the $116,847 to over 60%.  Even if your estate does not exceed the $5,250,000 IRS exemption, some states impose taxes on lesser amounts that can be as high as 30%.  Is there a better way to leave this money for your grandson?  Very possibly!

If you are insurable and considered a preferred risk you might be able to immediately guarantee your grandson as much as $145,000 totally free of income tax and estate tax, simply by repositioning the annuity’s cash value.  Its done with a combination of an immediate annuity and a Guaranteed Death Benefit Universal Life policy.

If you own a deferred annuity that you plan to leave to a loved one at your death, let me know and I may be able to help you defuse your tax time bomb.

Are you worth more dead than alive?  I doubt that…and that’s where I go next.

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