3 Answers

Function
Inherited annuities are subject to income tax. When you receive the death benefit of an annuity, which is the same as the annuity's account balance in most cases, you must pay income tax on the amount of money you receive. This income is counted as investment income.

Significance
The amount of money that you receive as income may increase your total gross income, and thus increase your total tax liability. This, in turn, could lower the total amount of your inheritance. You'll have to pay the taxes either out of your earned income or the inheritance money.

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   Misconceptions

   
   
   
   
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     A common misconception is that you must take a lump-sum distribution when you inherit an annuity. However, this is not true. You can take a monthly payment. To do this, you must elect to convert the inherited annuity to an immediate annuity when you file for the death claim after the original annuity owner has died.

     
     

     
     
     
     
   
   
   
   

   Prevention/Solution

   
   
   
   
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     If you take a monthly payment, most of the annuity payment will be treated by the IRS as a return of investment principal. This means that, unless the annuity was purchased inside an IRA, only a small portion of your annuity payment will be taxable. This would lower your tax liability over taking a lump-sum distribution.

     
     

     
     
     
     
   
   
   
   

   Considerations

   
   
   
   
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     When considering how to access your annuity inheritance, it's important to take into account what you will use the money for. If you need a lump sum of money, then regardless of what the tax implication is, it may be best to take the lump sum distribution. If you have a need for monthly payments, then you should consider the immediate annuity option.

     
     

     
     
     
     
   
   
   
   

Read more: Tax Implications of Inherited Annuities | eHow.com http://www.ehow.com/about_7386266_tax-implications-inherited-annuities.html#ixzz2PjTAA3Tz

Where are the annuity and inheritor located?

Just be prepared up to pay 35% taxes.