Sunset tax act new bill

Tax Impact of the Sunset Act on $11M Investments: Managed Accounts vs. Index Annuities

Background: The "Sunset Act" and Estate Tax Changes

• The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the federal estate and gift tax exemption (to over $13M per individual in 2024).
• Without further legislative action, these higher exemptions were set to "sunset" at the end of 2025, reverting to about $7M per individual (adjusted for inflation) in 202612.
• However, recent legislation ("One Big Beautiful Bill Act") has permanently increased the exemption to $15M per individual, indexed for inflation, eliminating the sunset and providing greater certainty for estate planning23.

Taxation of Managed Accounts

• Managed accounts (such as brokerage or advisory accounts) are typically taxable accounts.
• Income from investments (interest, dividends, realized capital gains) is taxed annually at ordinary income or capital gains rates, depending on the asset type and holding period.
• High-net-worth investors may also be subject to the Net Investment Income Tax (NIIT) of 3.8% on investment income if their adjusted gross income exceeds certain thresholds4.
• Upon death, assets in managed accounts generally receive a "step-up" in cost basis, potentially reducing capital gains tax for heirs.

Taxation of Index Annuities

• Index annuities are tax-deferred vehicles. Earnings grow tax-deferred until withdrawn.
• Withdrawals are taxed as ordinary income, not capital gains. If the annuity is funded with qualified retirement funds (e.g., IRA/401k rollovers), the entire withdrawal is taxable as ordinary income. If funded with after-tax money, only the earnings are taxable upon withdrawal5.
• No annual tax drag during accumulation, but withdrawals can push the investor into higher tax brackets.
• No step-up in basis at death; beneficiaries may owe income tax on deferred gains5.

Estate Tax Implications After the Sunset

CategoryManaged AccountsIndex AnnuitiesIncome Tax
Annual tax on realized gains/dividends4
Tax-deferred; taxed as ordinary income when withdrawn5
Estate Tax Exemption
$15M per individual (2026+, indexed)23
$15M per individual (2026+, indexed)23
Step-Up in Basis
Yes, at death
No step-up; beneficiaries taxed on gains5
Tax Drag
Ongoing
Deferred until withdrawal
NIIT (3.8%)
Applies to investment income4
Not during accumulation; may apply at withdrawal

Key Takeaways

• Estate Tax: With the new law, the estate tax exemption is $15M per individual, so an $11M estate (from either managed accounts or annuities) would not be subject to federal estate tax after 202523.
• Income Tax: Managed accounts face annual tax drag; index annuities grow tax-deferred but withdrawals are taxed as ordinary income.
• Step-Up in Basis: Managed accounts benefit from a step-up in basis at death, potentially reducing heirs’ capital gains tax. Index annuities do not provide this benefit.

Planning Considerations

• The choice between managed accounts and index annuities should factor in your income needs, tax bracket, estate planning goals, and desire for tax deferral vs. step-up in basis.
• With the estate tax exemption now permanently higher, the focus for many investors shifts to income tax efficiency and legacy planning rather than estate tax minimization.

Consult with a tax advisor or estate planner to tailor strategies to your specific situation, especially given the evolving tax landscape12354.

Connie Dello Buono

Index Annuities broker

Guaranteed retirement income for life with 0 market losses and admin fees

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