BRYN MAWR, Pa., March 12, 2007 (PRIME NEWSWIRE) -- The boom in the use of annuities as personal finance tools for retirement is having an unexpected side affect -- the children and grandchildren of many annuity holders may find themselves inheriting an asset that is a) structured to meet the income needs of people in retirement, b) highly illiquid, and c) subject to tricky (and often unpleasant) tax treatment.
With more than $1.6 trillion of assets backing annuities in the U.S. alone, according to industry estimates, annuities have become a major personal finance tool for investors looking to lower their tax profile and plan for retirement. While industry data is lacking on the amount of annuity wealth that is transferred each year through inheritances, the amount is clearly substantial, and beneficiaries should be aware of the potential tax consequences.
"When is good news also bad news for beneficiaries? When the inherited asset is an annuity," said Michael B. Vaughan, managing director of the J.G. Wentworth Annuity Purchase Program. Vaughan noted that most investors do not realize the potential tax implications of inheriting an annuity until they are faced with an unexpected tax bill on the inheritance.
Vaughan suggested that annuity holders consult their tax advisors on the following questions:
* Does the beneficiary have the ability to roll over or continue the deferral? * Will the inclusion of the annuity in the estate-tax calculation result in double-taxation -- estate and income -- subject to a partial offset for the estate taxes? * Will any beneficiary other than a spouse pay income tax on the annuity's gains as ordinary income when the gains are distributed? * Will the treatment of gains in an annuity as ordinary income rather than capital gains have a detrimental tax impact on the heirs? * What is the impact on the beneficiary of the lack of a step-up in cost basis?
"This is -- or should be -- a two-step process," says Vaughan. "An heir should find out what options are available to cash in the policy so that the funds can be put into another investment with lower tax consequences. And annuity holders who plan on transferring wealth to their heirs should consult their financial advisors on their options to pass on their annuity, in order to relieve the tax burden on their heirs."
About J.G. Wentworth
For more than 15 years, J.G. Wentworth has been purchasing annuities as well as other deferred payment streams. During this time, the company has purchased over $2 billion of future payment obligations. The company's annuity-backed notes are rated AAA by Standard & Poor's and Aaa by Moody's and sold to institutional investors. J.G. Wentworth is based in Bryn Mawr, PA. For more information about J.G. Wentworth, go to www.jgwentworth.com.