Do Death Benefits From an Annuity Become Part of the Estate Value?
When you die, all of the assets titled in your name become part of your estate. For federal tax purposes and for states that impose estate tax, there is a maximum estate valuation exemption before taxes are imposed. If your death benefits from an annuity pass to your spouse, it is not usually included in your taxable estate. If the death benefit passes to any other beneficiaries, it is part of your estate valuation.
Purchasing an annuity means that you establish an agreement with an insurance company under which you receive periodic payments, beginning at a specific date and generally continuing for the rest of your life. You may purchase the annuity in either a lump sum or by a series of payments to the insurance company. Investment options vary by the type of annuity. Like many retirement accounts, annuities are tax-deferred, meaning you do not pay money on income until you actually begin receiving payments.
If your annuity has a death benefit, you select the beneficiary to receive proceeds after your death. The amount is generally either a guaranteed minimum or all of the funds in the account. The guaranteed minimum might include all of the payments minus your previous withdrawals. If your annuity permits a "stepped-up" death benefit, the guaranteed minimum could be the account value on a particular date, such as the date of your demise. This locks in the account value, so if the amount declines in the near future, the beneficiary receives this designated amount. You will pay extra fees for the "stepped-up" option.
If you leave your death benefits from an annuity to a nonspousal beneficiary, the amount becomes part of your gross estate valuation. Because it is left to a beneficiary, it might not pass through the probate process, but that does not mean the value of the annuity is not part of your estate valuation for tax purposes. The estate tax exemption depends on the year in which you die. For 2012, the federal exemption is $5 million, but it is likely to change in subsequent years.
Gross Estate Valuation
When planning for the disposition of your estate, be aware of what the Internal Revenue Service considers part of the gross estate valuation. This includes not only annuities but real estate, stocks and bonds, cash, trusts, mutual funds, insurance or business interests. For estate evaluation, the fair market value of the assets is used. Estate deductions include mortgages, debts, funeral expenses, estate expenses and property passing to your spouse. To ensure that your estate need not pay more taxes than necessary, consult an estate planning professional.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.