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Subject:  Term Certain Annuitization - Inherited Annuity Date:  9/20/2012  12:42 PM
Author:  BaumgrenzeJohn Number:  116638 of 129771

I am confused about the tax treatment of a non-qualified annuity that is being inherited by a less than 59-1/2 year old beneficiary. The annuity is ~63% taxable.

It is probably not significant, but there was one surrender withdrawn by the purchaser during the lifetime of the annuity. I include this because there are tax consequences resulting from pay-outs from the annuity.

The beneficiary is considering a 5 year, term certain payout as an alternative to a lump-sum payment and trying to understand the income tax consequences. An illustration provided by the issuer of the annuity says that 63% of each payment is subject to income taxes. This suggests that the LIFO rule does not apply in this case and the tax consequences are relatively straight forward. Is this correct? Does the age of the beneficiary impact the tax status of a term certain payout?

I am a family member overseeing payout applications for 4 beneficiaries. Does anyone know if California, Illinois, Vermont, and/or Virginia treat the payout differently than the IRS?

Thank you,

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