451. How are annuity payments taxed to a beneficiary if an annuitant under a life annuity payout with a refund feature dies and there is value remaining in the refund feature?Stevenrcline202015-04-28T17:51:00Z2015-04-28T17:51:00Z23712120Summit Business Media174248714Site Map/Annuities/Nonqualified/Amounts Received as an Annuity/Fixed Annuities/Basic Ruleinvestment in the contract basis expected return2005-01-24T00:00:00ZTaxFactsDefaultArticleSite Map/Annuities/Quick Clicks/Exclusion Ratio10007-00-TF1.xml7.00;#1579;#1594;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What is the basic rule for taxing annuity payments?126266800.0000000000TaxFactsDefaultArticle2010-01-20T10:54:37ZSBMEDIA\moss-admin451. How are annuity payments taxed to a beneficiary if an annuitant under a life annuity payout with a refund feature dies and there is value remaining in the refund feature?If an annuitant under a life annuity payout with a refund feature dies and there is value remaining in the refund feature, the taxation of payments to the beneficiary under the refund feature depends on whether that beneficiary elects a new payout arrangement. If proceeds under the refund feature are taken by the beneficiary either as a lump sum or in accordance with the annuity payout option under which the annuitant’s payments were calculated, proceeds will be excludable from income until the total amount the beneficiary receives, when added to the amounts received tax-free by the annuitant, is equal to the annuitant’s “investment in the contract,” unadjusted for the value of the refund feature..Treas. Reg. §1.72-11(c). This “FIFO” (first-in, first-out) basis-first treatment of beneficiary payments is different than the income/gains-first treatment applying to “amounts not received as an annuity” and from the “regular annuity rules” treatment that normally applies to annuitized payments. If the total payments thus made to the beneficiary are less than the annuitant’s investment in the contract and the annuitant’s annuity starting date was after July 1, 1986, the beneficiary may take an income tax deduction for any such unrecovered investment..IRC Sec. 72(b)(3)(A).Planning Note: Advisors with clients who are beneficiaries of a non-qualified annuity under a refund feature should be alert to the application of these rules, especially if the contract in question was an immediate annuity. Most refund features in life-contingent annuities do not pay out the entire purchase price by the end of the refund period.(Example: In April, 2015, a life and 10 year certain payout from a SPIA purchased for $100,000 by a 65 year old male would pay about $6,000 per year. If the annuitant were to die during the refund period, the total payout would be only $60,000. The beneficiary’s deduction would not be $40,000, but the difference between $100,000 and the amount of all annuity payments made under the contract that were excluded from income – an amount greater than $40,000. - In the case of annuitized deferred annuities, the amount annuitized might be well in excess of the investment in the contract, in which case the investment in the contract might be recovered during the refund period. -John L. Olsen, CLU, ChFC, AEP)