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My uncle was one of 4 beneficiaries of a large insurance annuity held by my recently deceased grandfather. My uncle passed away unexpectedly and tragically before Christmas leaving behind his wife whom is not a direct beneficiary.

The family decided not to inform my grandfather as he was far gone with dementia and the news would probably cause him to suffer even more. Before any estate or beneficiary changes could be established however, my grandfather passed away a week later of natural causes.

The estate lawyer said that my uncles wife is not entitled to any inheritance as she is not on the will or as the beneficiary of the above mentioned annuity being by far the largest asset in the estate. This is an uncomfortable situation now as it is not clear what the surviving three children of my grandfather will do. My father, stated he was going to give a quarter of his inheritance to my uncles wife but was concerned about double taxation as he would have to pay income tax on his distribution of the annuity and then my aunt would then pay income tax on her portion as it would greatly exceed the allowed gift exclusion of $15k. It is also not clear if my other aunts and uncles plan to be as generous as my father.

Since the deaths were only a week apart, my uncles estate is still in full force so why exactly does his quarter of the annuity not go into possession by his estate then? Why cant my uncles estate just take the payout and pay he income tax on it directly, then get distributed to my aunt and closed out?

The location is Pennsylvania, USA.

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    You have a $11.58 million lifetime gift exemption. The $15,000 will only trigger a gift-tax filing with the IRS, you can count the rest of the gift against your lifetime exemption, nobody should pay extra taxes here. – Ron Beyer Jan 18 at 23:01
  • @RonBeyer Does that apply to state income tax too? I never knew that about the federal tax. – maple_shaft Jan 18 at 23:25
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    PA doesn't have a gift tax This wouldn't be income to your aunt (because it's a gift with no expectation of repayment or in exchange for something) no taxes should be due on the state level either. Please consult an attorney though! – Ron Beyer Jan 19 at 0:52
  • Your father could also make gifts to the three children, separately, even if they're minors - there is a $15k exemption to each one (so $60k for the four, including the wife). Further, your mother could, also, make a similar gift - another $60k in total. If the children are very young, the gift could either be to them for their college funds, or even to UTMA accounts - which could then be used to their benefit as needed. (That's only relevant though if your father's likely to hit the $11.5m lifetime limit). – Joe Jan 19 at 18:06
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    @maple_shaft Life insurance proceeds, gifts, and inheritances are not taxable income under either state or federal income taxation. A separate tax system applies for gifts and inheritances, but that exists only at the federal level and not at the state level in PA. – ohwilleke Jan 19 at 20:37
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No

Pennsylvania law § 2104 requires:

(10) Requirement that heir survive decedent for five days.--Any person who fails to survive the decedent by five days shall be deemed to have predeceased the decedent for purposes of intestate succession and the decedent's heirs shall be determined accordingly.

Now, a will can provide contingencies for if an heir predeceases the testator such as flowing to the heir's spouse or children but if it doesn't then the heir is treated as non-existent and what would have been their bequest is dealt with by the other provisions of the will.

The life annuity is not a part of the grandfather's estate and the funds will be distributed in accordance with the terms of its own contract, not the will. Usually, this means at the discretion of the trustee and nominations of beneficiaries are usually non-binding on the trustee; that is, they can distribute the funds as they believe the decedent would want.

Your aunt should seek proper legal advice quickly.

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  • My uncle died 10 days prior. Five days short of that seemingly arbitrary number. Unfortunate indeed. – maple_shaft Jan 19 at 3:13
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    @maple_shaft your uncle died 15 days short - the 5 days is after the testator died. Even if your uncle had died after your grandfather (within 5 days) he would be treated as if he died before. – Dale M Jan 19 at 5:16
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    Which, my understanding is to help with cases where e.g. a car accident kills someone and their spouse succumbs to injuries from the crash a few days later. – Azor Ahai -him- Jan 19 at 17:00
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The default provision is that the uncle has to survive the grandfather for his estate to inherit. A will or trust can have contrary language (sometimes requiring survival by 120 hours to 6 months) but it would be unusual for a non-spouse inheritor to have to survive by more than 120 hours.

In the case of a beneficiary designation on a life insurance annuity, the terms of the annuity, rather than a will, would control.

On the other hand, if the uncle predeceased the grandfather, he would not take. Subsequent comments/edits indicate that your uncle died ten days before your grandfather. Therefore, his estate does not inherit from your grandfather under any plausible scenario, and it is exceedingly unlikely that his wife would be a contingent beneficiary. Some trusts allow a beneficiary to exercise a "power of appointment" in a will or separate written instrument directing who will get their share if they predecease, but in the case of a will or life insurance annuity, it is extremely unlikely that this kind of power of appointment authority would be present.

It would be worth hiring a lawyer to investigate the facts and the language of the relevant documents promptly before there is any final distribution.

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    Several will-creating software packages I have used always insert a provision requiring that the recipient of a bequest must survive the testator by 30 days for the bequest to be effective. – David Siegel Jan 19 at 16:36
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Possibly, but probably not in this case

It is possible to make an estate the beneficiary of a life insurance policy or an annuity. For example, it is common to have the decadent's own estate to be a beneficiary or contingent beneficiary.

However, to the best of my understanding, this happens only when an estate is explicitly specified, such as "John Doe or his estate". Otherwise when a beneficiary dies before the insured, s/he takes nothing and the contingent beneficiary takes instead, that is why contingent beneficiaries are specified.

ohwilleke is correct that the terms of the policy document will control, and that it might well be worth while to have them checked in detail by a lawyer.

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