Do Death Benefits From an Annuity Become Part of the Estate Value?
Purchasing an annuity is one way to ensure that you have a regular income upon your retirement. Some annuities also have death benefits that provide your beneficiaries with a lump sum when you pass away. If your annuity contract has this feature, it could impact the amount of estate taxes that are paid when you die.
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Death Benefits
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An annuity contract is designed to give you a monthly payment once you reach retirement age. This monthly payment comes for a certain number of years or until you die, depending on the contract. If you pass away before you are able to take advantage of these payouts, the annuity company may provide a death benefit for the beneficiary that you name when you set up the contract.
Estate Value
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When you pass away, the total value of your estate will be established to determine how much is due in estate taxes. If you have an annuity that pays a death benefit, this amount of money will be added to the total value of your estate when you pass away. Even though the money is technically going to one of your beneficiaries, it has to be added to the totals so that the executor of the estate knows whether to pay estate taxes.
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Estate Taxes
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At the time of publication the federal government has a $5 million limit on the estate tax exemption. If the value of your estate is less than $5 million, you pay no tax on it. If the estate exceeds this amount, then taxes will be due.
Paying the Taxes
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Your beneficiary pays no taxes on his inheritance. Any taxes will be paid by the estate. While he does not have to pay taxes, the estate's tax liability could affect the amount of his inheritance.
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