The Hidden Cost of Inheritance | Avoid Tax Pitfalls

The Hidden Cost of Inheritance: How to Avoid a Tax Time Bomb

By Janet Friesenhahn, VP/Interim Director of Sales/Director of Agencies – FIC, LUTCF

For many retirees, annuities have served as a secure and tax-deferred way to grow savings for the future.

BUT WHAT HAPPENS TO THOSE FUNDS WHEN YOU PASS THEM ON TO YOUR LOVED ONES?
Unfortunately, most beneficiaries are unaware that inherited qualified and non-qualified annuities come with a tax burden. Without proper planning, your gift could create an unintended tax bill—just when your family needs the funds most.

ANNUITIES AND THE IRS: WHAT YOUR HEIRS SHOULD KNOW
Annuities grow tax-deferred, meaning taxes are postponed until withdrawals begin. While this is a benefit to you as the owner, your heirs are not as fortunate. At death, they will owe income tax on the gains, and in many cases, they will be forced to take taxable distributions shortly after inheriting the funds. In short, your hard-earned money may be diminished by income taxes before your loved ones ever see the full value.

A SMARTER WAY TO TRANSFER WEALTH
There is an often-overlooked strategy that can help you protect the full value of your legacy: converting your annuity into a Single Premium Whole Life (SPWL) insurance policy.

A SPWL policy allows you to use a one-time premium—often funded by liquidating a tax-deferred annuity—to purchase a life insurance plan that delivers a tax-free death benefit to your beneficiaries. Not only does this sidestep the income tax liability tied to annuity gains, but in many cases, the life insurance benefit is also significantly greater than the value of the annuity.

WHY CONSIDER CONVERTING?

Tax Efficiency: Life insurance death benefits are paid income-tax-free to beneficiaries, unlike annuity proceeds.
Leverage: The lump-sum premium can create a larger tax-free payout than the original annuity’s value.
No Ongoing Payments: With a single payment, the policy is fully funded—no monthly premiums to worry about.
Simplified Legacy Planning: Helps ensure your wealth is transferred quickly and without tax complications.

A REAL-LIFE EXAMPLE
Consider a 70-year-old woman with a $100,000 tax-deferred annuity that has appreciated over time. If left untouched, her heirs could owe thousands of dollars in taxes on the gains. Instead, by using that annuity to purchase a SPWL policy, she could create a guaranteed, tax-free death benefit of $180,677—depending on her health—providing her family with a greater and cleaner inheritance.

THE BOTTOM LINE
If your goal is to leave behind a meaningful legacy—not a tax headache—then it may be time to reevaluate how your wealth will be passed on. A Single Premium Whole Life insurance policy can be a powerful tool for transforming a tax-deferred asset into a tax-free gift.

Talk to your Catholic Life Insurance agent today to learn how a SPWL policy can help you transfer your wealth wisely—and ensure your legacy lives on, untaxed and uninterrupted.