Save. Plan. Retire.

annuities plain and simple guide save plan retire

What Happens to an Annuity When You Die?

what happens to an annuity when you die save plan retire

Wondering what happens to an annuity when you die? If an annuity is left to a beneficiary, they will owe income tax on any difference between what was originally paid into it and its current value; tax rates depend upon how it is withdrawn from.

There are various strategies you can employ when structuring an inherited annuity to reduce tax liabilities and save on taxes overall.


ScenarioAnnuity with Beneficiary DesignationAnnuity without Beneficiary Designation
Death During Accumulation PhaseBeneficiary receives death benefitAnnuity value may be forfeited
Death During Payout PhaseBeneficiary receives remaining paymentsPayments cease unless a joint annuitant is designated
Death of Primary Annuitant with No BeneficiaryAnnuity value may be forfeitedAnnuity value may be forfeited
Death of Primary Annuitant with Joint AnnuitantJoint annuitant continues receiving paymentsPayments may continue to joint annuitant
Death of BeneficiaryAnnuity value may be forfeitedAnnuity value may be forfeited
Estate Planning ConsiderationsAnnuity can be included in estate planningAnnuity value may be subject to probate
Tax ImplicationsBeneficiary may owe income tax on death benefitTax consequences may vary based on the situation
Policy-Specific ProvisionsAnnuity contract terms and provisions governAnnuity contract terms and provisions govern

Annuities are powerful retirement planning tools used by lotto winners, retirees and structured settlement recipients alike. An annuity provides a stream of guaranteed income that supplements pension or Social Security payments; many also buy an annuity as a legacy gift to protect their loved ones financially in later life.

An annuity contract will detail all available options for heirs and beneficiaries, for instance deferred annuities typically offer death benefits which provide either the remainder of an account or guaranteed minimum amounts to each of them upon their death.

Additionally, certain equity-indexed and variable annuity accounts offer a “stepped-up” death benefit option that allows insurers to calculate a high-water mark value and pay out an equal death benefit when an annuity owner dies, regardless of whether their account value drops below that number.

401(k) or IRA funded with pre-tax dollars may require a qualified domestic relations order (QDRO) in order to divide assets, while otherwise annuities can be directly passed on via inheritance without going through probate.

Immediate Impacts

Many annuities feature death benefit options that provide for minimum income after death. These features may be built directly into the contract (such as with period certain annuity s) or added as riders at additional cost.

Upon your death during accumulation, your beneficiary will inherit an annuity with either its investment value or cash value, whichever is greater. These inherited annuities often pay out as either one lump sum payment or as periodic installments throughout its beneficiary’s life time.

Stepped-up death benefit riders provide beneficiaries with access to the highest amount recorded on a contract (minus fees and withdrawals) when insurance companies learn of an annuitant’s death, thus helping reduce tax burdens on their heirs.

Other riders allow beneficiaries to choose to receive their account balance in installments or as a lump sum payment based on their needs and tax bracket, helping to minimize tax liabilities in any given year, particularly if they have multiple sources of income. Each annuity contract outlines its specific provisions which vary based on insurer and product type.

Beneficiary Designations

Beneficiary designations allow you to direct any remaining annuity payments to those or entities of your choosing, either when purchasing an annuity or within weeks after death. A beneficiary could include anyone from an individual to trusts or companies; most commonly people choose family members as beneficiaries.

An annuitant has no restrictions on how many primary or contingent beneficiaries they can name; however, minors cannot receive an annuity distribution. Beneficiaries named can also be divided “per capita” or “per stirpes,” so that should one beneficiary predecease you, their share would pass to their descendants.

An annuitant’s choice of beneficiary has an impactful influence on what they can do with an inherited annuity and how tax repercussions are handled. Spouses generally enjoy greater privileges than other types of beneficiaries and should receive preferential tax treatment; beneficiaries can opt to take either a lump sum payment or stream income over their lifetime – with lower taxation consequences from taking the latter route; they can even opt to sell all or parts of the contract altogether.

Death Benefit Options

An annuity’s options can have an enormous influence on its outcome after its owner dies. While certain decisions are predetermined at contract issuance time, others can be changed by annuitants as needed.

An annuity holder may choose between single life or joint life with survivor options for his/her annuity payments; in either case, upon death the remaining payments would go directly to a beneficiary designated by them; otherwise any funds would return back to the insurance company.

Beneficiaries of an annuity have the option to distribute payouts over five years or use a stretch provision that extends them throughout their life, in order to minimize tax implications. A financial professional can assist beneficiaries with understanding the different payment options and their corresponding tax implications, and contacting the annuity company as soon as possible (usually within several weeks after an annuitant’s death) so any issues are quickly and correctly addressed.

Tax Considerations for Beneficiaries

Once an annuity owner passes, their beneficiary must make decisions regarding how the death benefit should be distributed. Care should be taken when making these choices since once made they cannot be altered later.

Beneficiaries have several choices when selecting an annuity type; each option may have tax consequences that vary based on how it’s structured; lump sum payments could push a beneficiary into higher income tax brackets while regular payments over time could result in smaller withdrawals each year and lower tax exposure overall.

Beneficiaries have another option for annuity payouts called a “nonqualified stretch provision,” which enables them to extend them over their lifetimes. This option may be particularly appealing when purchased using after-tax funds and allows them to roll the money into what’s known as an “inherited IRA.” Unfortunately, this method has its limits: an annuity beneficiary cannot name Fido or Floofer as primary or contingent beneficiaries and only their spouse can be named as secondary beneficiary – additionally the annuity must pass through probate before money can be transferred into such an inherited IRA.

Annuities and the Probate Process

Many annuities offer guaranteed death benefits that will pay out some portion of your account value when you pass. This could take the form of either lump sum payments or payments over time depending on the contract terms; either way, this gives peace of mind to beneficiaries that their estate will eventually receive certain sum.

Beneficiaries have some flexibility in how they handle annuity inheritance, but are generally required to contact the company within a set period after your death in order to choose from various distribution options available to them.

Joint and beneficiary annuities are both popular choices when it comes to annuity investments. With joint annuities, you and another person sign an agreement with an insurance company to receive guaranteed income streams for life – even after one has passed on, their payments continue as per contract and continue being received by their surviving partner as per original contract terms. Joint annuities generally avoid probate fees while providing some tax advantages including lower costs to purchase them and reduced taxes on payments received.

Strategies for Annuity Distribution

Beneficiaries have several distribution options depending on the type of annuity. They may choose to receive either a lump-sum payout or periodic payments over time; additionally, beneficiaries can change beneficiaries at any time, per contract terms. An additional stepped-up death benefit rider option records contract value each month or year and uses its highest value figure as the basis for payout calculations.

Spousal continuation or 50% survivor annuities enable surviving spouses to change the names on an annuity contract and assume the original agreement, keeping its tax-deferred status while continuing income payments as scheduled.

Beneficiaries have several options when choosing to receive their contract’s value in payments: lump-sum distribution or fixed income payments based on life expectancy – typically best for younger individuals. A period certain annuity pays out payments over a specified period, for instance 10-20 years; should an annuitant pass away before this time limit ends, any remaining contract value returns back to the insurance company.

Regular Review and Updates

Your annuity contract likely contains details regarding naming beneficiaries and allocating any remaining balance to them. It’s essential to fully comprehend these choices and their ramifications before purchasing one, so read your contract thoroughly and question the person selling it if necessary. If anything sounds unfamiliar or is unclear to you, contact the insurance company’s phone support representative to inquire further on its product knowledge.

Consider options such as joint and survivor lifetime payout, which will guarantee payments until either of you passes away, or period certain annuities that pay out for a specified number of years before stopping (with some of your principal possibly returned later on).

After your death, you can also add riders that provide greater flexibility for your beneficiaries. For instance, you could specify that their accumulation value be paid out as one lump sum rather than periodic payouts to minimize taxes your beneficiary might owe upon inheriting it.






Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.