Offer Your Beneficiary a Stretched-Out Legacy from Your Longevity Annuity
A deferred longevity annuity offers you a future income beginning later in your retired life – to ensure you have an adequate income then. However, you might not get to use it because of your premature death. But, you can pass the advantage of its tax-deferred earnings to your annuity’s beneficiary and supply her income over much of her life.
A nonqualified annuity is one you fund with after tax dollars. You can provide your assigned annuity beneficiary to receive its lifetime income stream from it after you die. Its holdings can be “stretched out” over the beneficiaries’ lifetime, creating what’s known as a non-qualified stretch annuity.
The ability to stretch out distributions to a beneficiary comes from IRC section 72(s) which requires non-lump-sum annuity distributions to begin within one year of the annuity owner’s death. But the option to stretch out this distribution must be elected within 60 days after the benefit is payable. So this rule preserves the non-qualified annuity’s tax-deferral advantage for the beneficiary and allows him to avoid a high taxation rate that an all-at-once lump payout would produce.
*How long can your beneficiary stretch out his annuity payments?:
He can either have payments made to him over the IRS’s projected remaining life expectancy for his age; or he can simply have the payments annuitized under one of the insurance company’s annuitization options.
These options would be a life annuity, a life annuity with a period-certain guarantee, or a customizing distribution over a designated period. Depending on the age of the beneficiary, the annuity issuer may require that the term of years be reduced to the IRS’s projected remaining life expectancy for him.
According to the IRS table I for ‘projected’ single life expectancy, a 40 year old beneficiary has 43.6 years statistically projected to live – i.e. his remaining life expectancy. If this beneficiary chose to take yearly payments under the IRS required distribution scheme, his first annual payment would equal the value of the annuity at the end of the year of the owner’s death divided by 43.6 years. The subsequent annual payment would be the previous year end annuity value divided by 42.6 (i.e. one less than 43.6). The following year would be a similar evaluation but divided by 41.6 (i.e. one less than 42.6), etc.
Stretching out payments over a long time can really increase the total amount of money generated by the annuity since it’s always earning tax-deferred interest on its value.
*The 5 year alternate distribution term:
If you don’t invoke the one-year rule to permit the stretch options, then you must receive all the annuity holdings within 5 years after the owner’s death. The tax-deferral growth advantage remains in effect during this 5 year term. So you could choose to deferral all withdrawals to the end the 5 year period before emptying the annuity. But what you then took out may drive the income tax you must pay on it to a high bracket rate.
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