Do Inherited Annuities Generate a Tax Liability?

I thought children inherited everything at a stepped-up basis.

My mother held three annuities for many years and never sold any.

My sister and I are beneficiaries and we want to cash them in for lump sums. Do we have to pay taxes on the gains? The claim forms demand a lot of information for withholding.

The amounts are way under the inheritance tax threshold.

Are you confusing inheritance tax with estate tax? There is no federal inheritance tax, there are a few states with inheritance tax but not many and I think those that do have thresholds.

After the asset has been calculated in the decedents estate for the purpose of estate tax threshold and estate taxes paid if any are due you will inherit the asset’s fair market value as of the date of death. So yes set-up basis

I don’t know if there are special circumstances for annuities; for estate tax I expect not but as the bene of an annuity the issuer may have rules regarding a term renewal or redemption in your name.

Just a suggestion, but you should register on the new CHB and post this question there. I see that clydewolf, who is very knowledgeable on tax issues, registered there. He might see your post ane help you.


Thanks. I tried to post there but had been omitted as a user. When I tried to register again it wouldn’t take a new password.

Well, everyone I know has used these two terms interchangeably. Used to be the top rate was 55% but the threshold has been moved to 5 or 6 million now. That is why rich folks start foundations, to keep the government from taking most of their wealth.

They probably didn’t setup the system right.

To clarify, did you try to register as a new user? That is what you need to do. Nothing from the old boards carried over. They are starting totally from scratch so you need to do so as well.

I was able to register my former CHB ID there as a new user with no problems, as have a few others here from what I can see from the list of registered users there.

The terms should not be used interchangeably. There is a federal estate tax, that is the responsibility of the estate to pay. The current exemption is $12 million. That means only the amount of the estate that exceeds $12 million would be taxed. Some states also have an estate tax, and each sets their own rates and exemptions for the estate to pay. I think 5-6 states have inheritance taxes, which are the responsibility of recipient of the inheritor to pay. I think all states have their info online.

To answer your initial question, when you inherit an annuity, you have inherited a future stream of payments that has not yet been taxed and the taxability is determined by funding. If the annuity was initially funded with tax deferred dollars, like an IRA, one is taxed whenever those dollars are paid out and they are all taxable because the taxes were deferred. If the annuity was funded with after tax dollars, then that part of the annuity payout that represents growth will be taxed and that part that represents return of the initial investment will not be taxed. The annuity provider should have the formula based on IRS regs. The tax will be based on whatever amount is considered taxable of the proceeds.

There is no stepped up basis for inherited annuities or streams of payments like an IRA. I think that stepped up basis only applies to assets that would produce a capital gain if sold.