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I am one of three beneficiaries of a variable annuity left to me by my father. The other two beneficiaries have all taken their benefits in cash. I chose an option to defer payout for five years, because I am in a high tax bracket and will be retiring in about three years.

After some investigation I realize that the expense ratio for this particular annuity is very high. I am wondering if there is any way to exchange this money into a lower cost annuity of my own chosing? I think I could do this if I owned the annuity contract, but in this case the annuity contract is still in my father's name.

Russ
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<<I am one of three beneficiaries of a variable annuity left to me by my father. The other two beneficiaries have all taken their benefits in cash. I chose an option to defer payout for five years, because I am in a high tax bracket and will be retiring in about three years.>>

Ok...

<<After some investigation I realize that the expense ratio for this particular annuity is very high. I am wondering if there is any way to exchange this money into a lower cost annuity of my own chosing? I think I could do this if I owned the annuity contract, but in this case the annuity contract is still in my father's name.>>

Sorry to hear of the loss of your father. My condolonces.

It's likely that you would be unable to undertake a Section 1035 "exchange" of this annuity since it's wrapped up with the other beneficiaries.

And, as you note, the account is technically that of your father. You are simply named as a beneficiary. So even if you could overcome the first hurdle, the second hurdle might be even more daunting. Plus you'll have to fight with the annuity companies. And there may be some early termination fees.

But, that being said, I believe that if you can exchange the annuity while keeping it in your father's name (with you as beneficiary), it would not be deemed a distribution for tax purposes. While there are no cases "on point" that I can find on this issue, there ARE situations where the IRS will allow an IRA account to be "split" or moved into sub-accounts, or even transferred to another new IRA account, as long as the custodians are cooperative and the title is retained in the name of the decedent. I believe that if all of the paperwork could be completed correctly, you might have a reasonable shot.

But you'll want to do your own homework on this one. If something gets screwed up, and you are hit with a deemed distribution, it could be painful from a tax standpoint.

If it were me, I think that I'd just leave the account and eat the additional expenses. It just wouldn't be worth the risk for some annuity paper pusher to get it screwed up.

TMF Taxes
Roy

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Author: TMFTaxes Date: 11/6/00 6:07 PM Number: 41538
If it were me, I think that I'd just leave the account and eat the additional expenses. It just wouldn't be worth the risk for some annuity paper pusher to get it screwed up.

I think you are right. I'd just about come to this same conclusion myself, but thought I would throw it out to the experts to see if there were some other ideas.

Thanks for the comments,

Russ
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