Quick question for those that may have gone through this....

My father passed away in December and had a non-qualified annuity. I am thinking the simplest way to distribute to the 3 co-executors would be through a lump sum into my dad's estate account.

I have read that for non-qualified plans, only the gains will be taxed.

But also read there may be a 10% fed tax penalty if under the age of 59 1/2. So if one (or more of the executors) is under 59 1/2, they will have to pay the 10% fee when they file their individual 2024 tax returns? Am I understanding this correctly? Or am I completely confused - which is most likely the case!

After researching a little more I think the 59 1/2 applies to my father so it seems the early penalty does not apply here.

The beneficiary was listed as "Testamentary Trust"... which there was none so I had to write a letter to the Legal Dept of the life insurance company and state that no trust existed, and that the Letters Testamentary states that we are the three co-executors of the estate of my father. We created an EIN for the estate and the insurance is OK with that.

TxAger said:

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The beneficiary was listed as "Testamentary Trust"... which there was none so I had to write a letter to the Legal Dept of the life insurance company and state that no trust existed, and that the Letters Testamentary states that we are the three co-executors of the estate of my father. We created an EIN for the estate and the insurance is OK with that.

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YUCK!

Glad you got it worked out with the insurance company. Dealing with lack-of-beneficiary messes can be annoying. Sounds like your situation went about as smooth as it could considering the circumstances.

If you are ever starting an IRA and the agent proposes that you put TRUST anywhere in the beneficiary line, go find another custodian.
To answer an earlier response the only way the executor can ever override a beneficiary designation is for the beneficiary to disclaim the benefits, in writing.

Follow-up question (a dumb one) on this topic:

This is a non-qualified plan (funded with after-tax dollars), contract type: variable.
I have read that fed taxes are to be paid on the gains only.

We received the check and it is made out to "the estate of John XYZ"
We have 3 co-executors where the distributions are to be equally divided.

Does the Estate file w/ the IRS and pay the fed taxes out of the estate account?

Or do the distributions go equally to the 3 executors and then the executors will enter their disbursement amount on each of their tax filings?

Sorry, I know, I know this is a dumb question... and I am going to meet with my dad's banker and plan on checking with him later.

The estate files a Form 1041 reporting its income and expenses. If the estate does not distribute any assets to beneficiaries, then the estate will pay income tax. If the estate does distribute assets to beneficiaries, then a portion of or all of the income will be reported by the beneficiaries. Each beneficiary will receive a k-1 telling them how much of the income to report.

rgm97 said:

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The estate files a Form 1041 reporting its income and expenses. If the estate does not distribute any assets to beneficiaries, then the estate will pay income tax. If the estate does distribute assets to beneficiaries, then a portion of or all of the income will be reported by the beneficiaries. Each beneficiary will receive a k-1 telling them how much of the income to report.

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agree with this.

to add, you will want to pay this at the personal level. the tax rate at the estate level will be much greater than your personal tax rate.

OK here's another dumb question... Actually two.

Let's say we deposit the full amount into the estate bank account. And to make it easy, let's say it's $300,000.60

Then later, we have the bank cut a check to each of the 3 beneficiaries, so $100,000.20 each

How does the IRS know that the Estate is not going to file, and that the 3 individuals are going to file?
I understand that the IRS has record (I assume) that the $300,000.20 was distributed from the Annuity company to the Estate's EIN.

But there is no record of those funds going to the 3 individuals, no?

Question 2: does the amount distributed to the 3 beneficiaries have to total up to exactly $300,000.60 ?


Or do we have to file it with the Estate filing, since the check was made out to the Estate (and deposited into the Estate account) ?

1) the estate income tax return you will have to file will show who the distributions went to. Each beneficiary of the estate will get a K1 (kinda like a 1099/w2) that shows their share of all income and expense.

2) no

I was just reading about 1041 and that's where we would report the distribution.

Thanks!