ARE FIXED AND VARIABLE ANNUITIES ESTATE TAXED?

Good question! Yes, annuities both fixed and variable are included in estate-taxed assets.

What has happened since 2010 & what could happen by 2015.

With 2015 approaching, many families and their financial, tax and legal consultants are weighing major estate planning decisions. A short-term window of opportunity may be closing. The relatively lower tax rates we have now may soon disappear, along with some of the largest federal tax breaks available in decades.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

 
Estate taxes are at 80-year lows. At the end of 2010, Congress reset the estate, gift and generation-skipping tax (GST) rates at 35% and raised the lifetime federal gift, estate and GST tax exemptions to $5,120,000 until January 1, 2013. Some Capitol Hill legislators want to see these rates retained, even made permanent. Two other scenarios may be more likely.1,2

In the first scenario, the Bush-era tax cuts expire at the end of 2012 and it becomes 2001 all over again: the lifetime estate and gift tax exemptions fall to $1 million and estate taxes are reset to 55% (60% for some households).3

In the second scenario, Congress makes good on President Obama’s request to turn the clock back to 2009: estate taxes reset to a top rate of 45% with a $3.5 million personal exemption. (The lifetime gift tax exemption would still fall to $1 million.)3

The current $5,340,000 personal exemption is portable between spouses. This represents a major tax break for wealthy families – an opportunity to transfer significantly greater amounts of wealth without triggering transfer taxes.

Currently, executors have an option to transfer an unused portion of a deceased spouse’s $5,340,000 lifetime unified gift/estate/GST exemption to a surviving spouse. So with this new portability, a married couple can potentially transfer up to $10,680,000 of assets without incurring any federal estate tax.

Portability is not automatic. When the first spouse passes away, the executor of his or her estate must file a federal estate tax return even if no estate tax is owed. That move formally notifies the IRS that you are transferring the unused or partially used personal exemption to the surviving spouse. This estate tax return is due nine months after the death of the first spouse, with a six-month extension permissible.5,6

If some planning needs to be done to bring the value of your taxable estate under $5.34 million (or $10.68 million), your executor could make donations to qualified charities or non-profits on your behalf to lower the taxable value of your estate, although your heirs would consequently be left with less.4

You can shrink your taxable estate without reducing the lifetime exemption. In 2014, the annual federal gift tax exclusion is set at $14,000. So you (and your spouse) may gift up to $14,000 each to an unlimited number of individuals in 2014 without reducing your lifetime $5.34 million gift/estate tax exemption. Those gifts can even be made as payments for school expenses (except housing costs) or medical bills.4

Keep the $14,000 annual exclusion limit in mind: in 2014, gifts in excess of $14,000 per individual do cut into the $5.12 million lifetime exemption dollar-for-dollar.4

These are the views of AnnuityGuys.com, which does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent planner/educator professional. Please consult a financial advisor for further information.

Citations.
1 – businessweek.com/investor/content/dec2010/pi20101223_554594.htm [12/23/10]
2 – www.ppglc.com/CYETG11_2B.pdf [2011]
3 – online.wsj.com/article/SB10001424052970204059804577227450551030364.html [2/18/12]
4 -www.smartmoney.com/retirement/estate-planning/estate-tax-tips-for-married-couples-1300466869017/ [1/30/12]