Getting rid of a fixed annuity inheritance is neither difficult nor painful, but the tax bill it leaves behind just might be. Although you do have options, few come without a corresponding tax liability for the year in which you dispose of part or the entire annuity. However, if you want to dispose of a fixed annuity inheritance despite this news, knowing what to expect can help you choose an option that works best for you and your tax situation.
Fixed annuities are a safe, slow-growth form of income insurance for a more conservative investor. Except for an annual interest rate adjustment, the rate of return on a fixed annuity is constant during its growth phase, and a variety of payout options provides an opportunity to customize the payout timeline and monthly payment. The value of the fixed annuity at the time it becomes yours depends in large part on whether payments have begun or if the annuity is still growing.
Step one in getting rid of a fixed annuity inheritance is to get it transferred to your name. Ask for and fill out a "Beneficiary Claim Form," and return the completed form along with a copy of the death certificate. Understand that although submitting this form is a requirement, it is even more important if you are listed in the annuity documents as a beneficiary but are not mentioned as a beneficiary in the deceased's will. Failing to file the correct paperwork means the will's beneficiaries will take possession of the annuity.
"Cash out and close" is for many the only way to get rid of a fixed annuity. You have two cash-out options to choose from, however, with each covering a different timeline and each affecting your tax liability differently. Option one is to cash out immediately and rid yourself of the annuity. Choosing a lump sum disbursement means you will pay income tax on the annuity gains – the balance in the annuity minus contributions – in the year you take the lump sum payment. Option two involves cashing out over a period of up to five years. Funds already in the account continue to grow until you withdraw them and you get to spread your tax liability over time rather than paying all at once.
Getting rid of a fixed annuity by rolling it into another tax-deferred IRA annuity is an option if you're the spouse of the annuity owner. Although, technically speaking, you still own an annuity, rolling it over allows you to get rid of the fixed annuity you inherited without having to pay income tax on its gains. It becomes part of the new plan and continues to grow tax-deferred until you begin making withdrawals.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.