Subject: Passing on of annuitant
Required Distributions on Death
In order for payments under a contract to be taxed as an annuity, the contract must require a payout of any amounts undistributed at the holder's death to be distributed within a prescribed period of time. 60 The prescribed period of time for distribution depends upon whether the holder died before or after the annuity starting date.
footnote/ 60 §72(s), effective for contracts
issued after Jan. 18, 1985. A contract exchanged after that date for one issued before it
is considered to be a new contract and therefore subject to the required distribution
rules.
Note that these rules apply to annuity contracts other than under qualified retirement
plans and individual retirement annuities. 61 Similar, but slightly different rules
apply to those plans. 62
/Footnote/ 61 §72(s)(5).
/Footnote/ 62 Qualified plans and individual retirement arrangements are subject to the rules under §401(a)(9) and its regulations. See the discussion in ¶5550, and in 370 T.M., Qualified Plans--Taxation of Distributions, and 355 T.M., IRAs and SEPs.
Death Before the Annuity Starting Date
If the holder dies before the annuity starting date, all amounts to be distributed under the contract must be paid to the holder's beneficiary within five years after the holder's death. 63 However, if the distributions begin within one year after the holder's death, any part of the distribution that is to be made over a designated beneficiary's life expectancy (or over a period not longer than such life expectancy) is treated as having been distributed in full on the date the distributions begin. 64
/Footnote/ 63 §72(s)(1)(B).
/Footnote/ 64 §72(s)(2).
Death on or After the Annuity Starting Date
If the holder dies on or after the annuity starting date, the remaining undistributed portion of the contract must be distributed at least as rapidly as under the method of payment in effect at the date of the holder's death. 65 The same exception for distributions made to a named beneficiary over his or her life expectancy applies to this case as well.
/Footnote/ 65 §72(s)(1)(A).