How does a beneficiary avoid the annuity tax?


Quick Answer

In order for a beneficiary to avoid paying annuity taxes, the dying estate holder must have a total estate value less than a threshold set by federal and state law, according to Elder Parent Help. This allows the death benefit to pass on to any inheritors.

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Full Answer

Retirees typically have deferred annuities in their portfolios, which are often taxed when their estates pass on to their beneficiaries. These annuities are not taxed when making contributions, according to Elder Parent Help. The dividends paid out by these annuities are also tax free. However, in the majority of cases, the annuities are not touched by the retiree, which means that the beneficiary is left to pay an annuity tax.

If the beneficiary receives the annuities from the estate, it is not possible to avoid paying taxes, unless the entire estate is below the local taxable limit. This also incorporates specific deductions, including mortgages, debts, estate expenses and property which is passed specifically to a surviving spouse. Additionally, the beneficiary receives a deduction in the form of "lifetime taxable gifts," according to Elder Parent Help. This lifetime limit is calculated on a pro-rate basis, and it allows all but the richest estates to bypass estate taxes.

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