Can Annuities Have Beneficiaries?

If an annuity contract has a death benefit provision, the owner can name a beneficiary to receive the remaining annuity payments after he or she passes away. An inherited annuity’s earnings are taxed. The tax treatment of inherited annuities is determined by the payment structure and whether the annuitant is the surviving spouse or someone else.

Do annuities have a death benefit?

Annuities can help you fund your retirement. Most annuities, however, include a standard death benefit. This allows you to leave annuity assets to an heir after your death.

How many beneficiaries can be on an annuity?

The annuity owner’s primary beneficiaries are the people he wants to inherit any money left in the account when he dies. Although there is no restriction on the number of beneficiaries that can be chosen, annuity owners must name at least one major beneficiary. Owners can also indicate how the funds will be distributed among beneficiaries. Beneficiaries may include businesses and charitable organizations, but inanimate objects and pets are not eligible.

What happens to annuity after death?

  • Annuity for life with purchase price return on death – Annuity payments stop when the annuitant dies, and the purchase money is returned to the nominee.
  • Lifetime annuity with a 100 percent payout Annuity payable to spouse on annuitant’s death – Annuity is paid to the annuitant’s spouse during his or her lifetime. If the annuitant’s spouse dies before the annuitant, the annuity will stop paying after the annuitant’s death.
  • Lifetime annuity with a 100 percent payout Annuity payable to spouse on annuitant’s death with return on annuity purchase – On the annuitant’s death, annuity is paid to the spouse during his or her lifetime, and the purchase money is returned to the nominee after the spouse’s death.
  • Default Annuity Scheme (Applicable only to Government Sector Subscribers): For a detailed description, please see question no. 5.

Can an annuity be passed on to heirs?

Most annuities, like other investments, can be passed down to your heirs in the case of your death. However, it’s crucial to understand that annuities are fundamentally a life insurance product, which affects how they’re taxed and passed down.

Do beneficiaries pay tax on inherited annuities?

Inherited annuities are subject to income taxation. A tax-deferred annuity beneficiary can pick from a variety of payment alternatives, which will impact how the income benefit is taxed.

If the annuitant’s spouse is the beneficiary, the spouse might alter the contract’s name to his or her own. The contract continues as if the surviving spouse owned the original contract after a change of ownership. It keeps its tax-deferred status, which means the beneficiary doesn’t have to pay taxes right away.

The spouse could choose to take a lump sum payment right now. This is also a viable choice for other beneficiaries. In this case, the beneficiary will be responsible for paying taxes on the total difference between the annuity’s purchase price and the death benefit. This is the option having the most tax implications for the recipient.

The money can also be withdrawn over a five-year period by the beneficiary. He will only owe taxes on the increased value of the portion that is removed during the year at that time. This choice reduces the chances of the beneficiary falling into a higher tax rate. Increasing your tax bracket involves paying more money in taxes.

The option with the lowest tax risk is to pay the death benefits over the beneficiary’s life expectancy. Benefits will be paid out over a longer period of time as a result.

What is the best thing to do with an inherited annuity?

You have the option of taking any remaining money from an inherited annuity in one big sum. Any taxes due on the benefits must be paid at the time they are received. The five-year rule allows you to spread payments from an inherited annuity over five years while still paying taxes on the payouts.

How long does a beneficiary have to claim an annuity?

Fortunately, there is a little-known technique for a non-spouse beneficiary to spread payments and taxes out over time, continue to benefit from tax deferral, and thus earn more money in the end. But first, let’s look at the two most common methods people have obtained annuity money:

The five-year rule is the default. The annuity proceeds must be taken out within five years of the death of the recipient or beneficiaries. They have until the fifth anniversary of the owner’s death to take them out in installments or in one lump amount.

Is an annuity considered part of an estate?

All assets titled in your name become part of your estate when you die. There is a maximum estate valuation exemption for federal tax purposes and for states that impose estate taxes before taxes are applied. Your annuity death benefits are normally not included in your taxable estate if they go to your spouse. The death benefit is included in your estate valuation if it goes to any other beneficiaries.

Can annuities be transferred?

Annuities in an IRA can be transferred immediately to another IRA with an annuity carrier without incurring any tax implications. Only deferred annuities such as variable, fixed, or indexed annuities can be moved because immediate annuity structures cannot be transferred.

Can a power of attorney change beneficiaries on an annuity?

This authority gives your attorney-in-fact the authority to purchase, borrow against, cash in, or cancel insurance policies or annuity contracts on your behalf, as well as for your spouse, children, and other dependent family members. The attorney-in-authority fact’s extends to all of your policies and contracts, regardless of whether they name you or someone else as the beneficiary—that is, the person who will receive any insurance funds after you die.

The only exception to this rule is if you and your spouse both have insurance plans. Any transaction that impacts the policy requires your spouse’s consent under these policies. If your attorney-in-fact is not your spouse, he or she must first acquire your spouse’s consent before acting. Even policies in one spouse’s name, especially in community property states, may be owned by both spouses. Consult an attorney if you have any queries about who owns your insurance coverage.

If you already have an insurance policy or annuity contract, your attorney-in-fact has the authority to maintain paying the premiums or cancel it, whichever is in your best interests.

Your attorney-in-fact also has the authority to change and name beneficiaries on your insurance policies and annuity contracts with this authority. Because this is such a broad power, it’s a good idea to talk to your attorney-in-fact about your objectives. Make it clear that you don’t want your attorney-in-fact to change your beneficiary designations. You can also talk about who should be the designated beneficiary of any new policies if you have strong opinions about it.

Should a trust be the beneficiary of an annuity?

The potential payout alternatives for a trust that is the beneficiary of a death claim can vary depending on the trust and whether the annuity is qualified or nonqualified.

A person who is the beneficiary of an annuity can usually spread payments out across their lifetime or life expectancy. Because a trust has no life expectancy, it is unable to lengthen its dividend. Unless one of the exclusions listed below applies, the annuity must be distributed in full within 5 years.

If an IRA owner’s statutory commencing date has past, the beneficiary may be able to stretch benefits over the original IRA owner’s life expectancy, based on their age at the time of death. Nonqualified annuities have a comparable option, but only if the owner had annuitized the contract that gave a death benefit to the recipient.

If the trust meets certain standards, such as those listed below, the IRS allows payments to be based on the life expectancy of the oldest trust beneficiary.

  • By October 31 of the year following the owner’s death, certain trust papers must be given to the IRA provider.

Both qualified and nonqualified annuities with a grantor trust as beneficiary have previously received favorable private rulings from the IRS. The IRS allowed the grantor trust’s owner to be considered as the annuity contract’s specified beneficiary in the rulings. This enables the trust’s grantor to spread the rewards throughout their lifetime or life expectancy. The grantor may chose spousal continuation if he or she is the owner’s surviving spouse.

While estate planning professionals have improved their ability to design complex trust documents that comply with IRS regulations, mistakes still occur. Unfortunately, they’re usually only discovered after the person has passed away. Naming a contingent beneficiary is a straightforward technique to help mitigate this risk. The trustee may be able to disclaim the death benefit if a trust is identified as the beneficiary of an annuity contract and it is later revealed to limit the beneficiary’s alternatives. The contingent beneficiary would then receive the benefit as though they were the primary beneficiary.

Although trusts as beneficiaries of qualifying annuities have more flexibility, there are still ways to arrange for a trust beneficiary of either. Trust accounting is difficult and should be left to a tax professional.

This communication’s subject matter is supplied with the knowledge that Principal is not providing legal, accounting, or tax advice. On all questions relevant to legal, tax, or accounting obligations and requirements, you should consult with suitable lawyers or other consultants.