Non-Qualified Annuity Beneficiary Tax

What is the name of your state (only U.S. law)? NC

Ok…I have a tax question I have run by a couple CPA’s and I can’t get an answer to...any input would be appreciated.

My grandmother died in September, 2008 and one of her assets was a non-qualified deferred annuity worth about $70k. It had a $50k basis – so about $20k of taxable gains. The named beneficiary was her daughter (my aunt). However, she didn’t need/want the money so she gave it to her father (my grandfather).

Here are my questions:
1) Will my aunt need to complete a gift tax return for 2008 because she in effect gifted this money to her father
2) Is there any way she could transfer it in a way where he pays the income tax on the money rather than her – he is in a lower tax bracket.

The bottom line is this…my grandfather should have been the beneficiary in the first place through some oversight it was left to my aunt. They would like to figure out how to unwind this whole thing now (which I realize is probably hard to do after death) and make it as if he was the beneficiary in the first place.

Any thoughts on how to handle this would be appreciated.

However, she didn’t need/want the money so she gave it to her father (my grandfather).

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I think that you need to elaborate on this. Was the annuity contract surrendered, aunt received the proceeds, and then gifted cash to her father?

Yes, she must file the gift tax return, but unless she's got a lot of money she has been giving away she doesn't owe any tax on the money.

The only other possible way is that if he was a backup beneficiary, she could just refuse it and it would transfer to him as if he as the primary.

But, as I said, you have to have an given away (or left as inheritance) a million dollars before there is any tax issues.

If this is a straight cash payout, then all she needs to do is give it and file the form. If there is any income that accrued AFTER the death and before she gave it away, she'll have to pay taxes on that income (probably not substantial, but she needs to account for it on her taxes).

If this is a straight cash payout, then all she needs to do is give it and file the form. If there is any income that accrued AFTER the death and before she gave it away, she'll have to pay taxes on that income (probably not substantial, but she needs to account for it on her taxes).

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Ron -- That isn't the case. Annuities do not receive a stepped up basis upon death of the owner. When withdrawals are made, a taxable event occurs. And, if I remember my ordering rules correctly, the first amounts withdrawn are considered to come from appreciation, and, therefore, are taxable. Until all the appreciation is withdrawn and one gets down to withdrawing premiums paid, which would be non-taxable.

The only way for aunt to not pay taxes on the money is to disclaim (see rules on qualified disclaimer) them. She would not get to designate who they go to, they would then go to the contingent beneficiary or, if none, to the estate.

If the amount was already received the transfer would be a gift.