Most of us do not have the natural flexibility we had when we were kids. Sometimes I see my son get in the most awkward positions and cringe thinking about how my body would react if I did the same thing. Well, I'm sure many of your clients would like that same flexibility in retirement, and if they are beneficiaries of a nonqualified annuity, then it can be as simple as "stretching."
One of the options that a non-spouse beneficiary of a nonqualified annuity has is to take distributions over their life expectancy. This can be done through annuitization, or if flexibility is the goal, can be taken as scheduled withdrawals within the deferred annuity contract, also known as a "nonqualified stretch" annuity.
When your client elects a nonqualified stretch option, they are electing to take life expectancy payments, allowing the undistributed annuity contract value to continue with tax-deferred growth. Thus, your client will have the option to defer much of the taxes that are due by only taking the life expectancy payment amount, rather than taking a lump sum and exposing themselves to tax liability on all of the taxable gains.
Although your client is electing to take scheduled withdrawals based on their life expectancy, at any time they can still take more than the life expectancy payment amount and even request a full distribution (subject to product limitations). Also, the 10% federal tax for early withdrawals (prior to age 59½) does not apply to any distributions taken due to a death.
In 2013, a private letter ruling was issued to allow a non-spouse beneficiary of a nonqualified annuity to process a tax-free 1035 exchange of death proceeds from multiple annuity contracts (owned by the same decedent) into a new deferred variable annuity contract. This is explained more fully in Barbara's blog post titled "Wealth Transfer and a Recent Private Letter Ruling." And effective April 1, 2015, Pacific Life can now accept a post-death 1035 exchange of nonqualified stretch annuities into our deferred variable annuity products.
Although we may never regain the flexibility we had as children, we can help clients that are beneficiaries of nonqualified annuities gain flexibility in their retirement by having them stretch. Please review this piece to see how to move your clients' nonqualified stretch annuities via tax-free 1035 exchange.
As always, if you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.
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