I’m working on an interesting case now involving a nonqualified annuity and the payout thereof.

A woman in her 40’s invested in an annuity contract and named her fiancee as beneficiary.

The woman died only a few years after the contract was issued, and the fiancee goes to collect on the contract.

Of course the insurer asks for a certified copy of the death certificate, and a notarized statement from the claimant/fiancee.

However, the insurer is also asking for a tax waiver from the state of New Jersey. The insurer is protecting themselves in the event New Jersey inheritance taxes are not paid: the insurer would be (or might be) on the hook for inheritance taxes due to New Jersey if the estate of the decedent did not pay.

In this case, the fiancee and the decedent’s family didn’t like each other when the decedent was alive; after her death they are bitter enemies. Since the fiancee was just that: a fiancee, and not a spouse, the decedent’s brother, her closest living relative, is entitled to Letters of Administration for the decedent’s estate. The fiancee has no legal standing.

The Administrator, the decedent’s brother, has basically told the fiancee to ‘get lost,’ and the Administrator is not helping the fiancee in any way whatsoever to obtain the tax waiver.

Without the tax waiver, the insurer is simply not paying out the annuity. Why should they? We’ve tried to have the insurer payout half the annuity, and retain half as a reserve against potential tax liability, so the fiancee can move forward with his life (and pay me), and we have time to figure out how to proceed. The insurer rejected this proposal, so right now we’re weighing all of our options.

Importantly, the sales representative had no idea this was a requirement, and is taking hell from the fiancee. My guess is all insurers have the same policy, and as well all financial institutions would with respect to ‘transfer on death’ or ‘payable on death’ accounts.

Further on this issue, more or less, I’ve had situations where the beneficiary of a decedent’s life insurance policy collected the proceeds (no tax waivers are required in New York), and refused to tell the executor how much the death benefit was. This is a problem, since the death benefit must be included on the decedent’s tax return (even though the proceeds are included as gross income). We had a bit of a hard time getting form 712 from the insurer (which is sort of like a 1099, a form which reports information to the IRS) to attach to the estate tax return.

Which led then to the further thought as to the situation where someone owned life insurance on the decedent’s life (which thus must be reported on the estate tax return, form 706), yet the executor was not aware the contract even existed. I’ll bet this situation is more common than we know, because we don’t know what we don’t know.

Eventually, I suppose, the IRS will catch up because the insurer is required to send in the form 712 to the IRS, who will then, theoretically, see if it was reported on the decedent’s estate tax return.