Tax Facts Q: 397. What distributions are required when the owner of an annuity contract dies before the entire interest in the contract has been distributed?
The IRS recently ruled that an annuity with guaranteed lifetime withdrawal benefits ("GLWB") covering the lives of the contract owner and a non-spouse beneficiary could be modified to eliminate the mandatory withdrawals that the non-spouse beneficiary would be subject to because of the owner's death, thus allowing the beneficiary to take advantage of guaranteed payments over his or her lifetime, rather than exhausting all annuity benefits within five years of the owner's death.
In this case, the company issuing the annuity wanted to make annuity products with GLWB riders more attractive by allowing the non-spouse beneficiary to continue the contract without worrying about making excess withdrawals that could reduce the guaranteed amount that would otherwise be payable over his or her lifetime.
The IRS found that the company was permitted to allow the non-spouse beneficiary to continue the contract, with a new death benefit payable at his or her death, as long as the beneficiary included in gross income any amounts that would have otherwise been distributed upon the contract owner's death.