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Oct 18 2010 12:00AM


At death, does an annuity have a stepped-up basis like common stock has for estate tax and future federal tax?


"Annuities do not get a step-up in basis at death," said FPA member Ruth Delaney, CFP®, of Greenleaf Financial Strategies. “Any taxable distributions from the annuity are subject to ordinary income tax. This is one of the drawbacks of annuities. However, there are many positive aspects to annuities that may outweigh any concerns about the lack of stepped-up basis. Without a complete financial picture of the people involved, a recommendation one way or the other cannot be given.”

For his part, FPA member Bob Rall, CFP®, of Rall Capital Management said there are really two questions here. “Regarding the estate tax, the annuity is valued at date of death,” he said. “It is included in the owner’s estate and subject to any applicable estate tax. From an income tax standpoint, there is no step-up in basis. If an owner/annuitant dies before the annuity start date of a deferred annuity, the death benefit received that is in excess to the owner/annuitant’s investment (basis) in the annuity is considered 'income in respect of a decedent' (IRD). If the IRD is paid to the decedent’s estate, it is reported on the final income tax return. If the IRD is paid to a beneficiary, it is reported on the beneficiary’s tax return.”

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