What are the rules for beneficiaries on annuity accounts?

Yes, you can leave your annuity to your children by naming them as beneficiaries on your contract.

How It Works

• Direct Designation: You name your children directly on the insurance company's beneficiary form. This overrides your will.
• Deferred vs. Payout Stage: If your annuity is still growing (deferred), your children typically receive the remaining account value. If you are already receiving payouts, what they receive depends on whether you chose a plan with guaranteed periods or joint benefits.
• Trust Option: You can also name a trust for your children as the beneficiary. This helps manage the money if your children are young or need special financial protection.

Tax Rules and Timelines

• Taxes on Growth: Your children will owe ordinary income tax on the earnings portion of the money they withdraw.
• The 10-Year Rule: Under current federal rules, non-spouse beneficiaries like children usually must empty the inherited account within 10 years. They can take it all at once or spread withdrawals across that period.
• Read more about payout choices and guidelines in this guide on Inheriting an Annuity from Annuity.org.

Yes, your wife can inherit your annuity if she is named as the primary beneficiary on your contract.

Spouses have the most flexible and favorable options when inheriting an annuity compared to non-spouse beneficiaries.

Spousal Inheritance Options

• Spousal Continuation: Your wife can take over the annuity contract and put it in her own name. This allows the funds to keep growing on a tax-deferred basis.
• Lump-Sum Payout: She can withdraw the entire balance at once. This choice gives immediate cash, but it can trigger a large income tax bill.
• Periodic Payments: She can set up regular withdrawals over a specific timeframe or her own life expectancy.

Important Rules to Remember

• Sole Beneficiary Status: Spousal continuation works best if she is listed as the sole primary beneficiary on the account. Multiple beneficiaries or a named trust can limit these specific spousal rights.
• Type of Annuity Matters: If your annuity is qualified (funded with pre-tax dollars like an IRA), all withdrawals are taxed as ordinary income. If it is non-qualified (funded with after-tax dollars), only the earnings are taxed.
• Contract Type: Immediate annuities that are "life-only" will stop payments when you die unless you selected a joint-and-survivor option or a period-certain guarantee.

The best choice for an inherited annuity is to spread out distributions over time (such as a 10-year period or life expectancy) rather than taking a lump sum, which minimizes your immediate income tax hit.

Because annuities do not get a "step-up in basis," all earnings or pre-tax contributions are fully taxed as ordinary income. Taking everything at once can push you into a much higher tax bracket.

Best Options Based on Your Situation

• If you are the surviving spouse: Choose spousal continuation. This lets you take over the contract as your own, keep the tax-deferred status, and delay withdrawals until your own retirement.
• If you are a non-spouse beneficiary (Qualified/Pre-tax): Use the 10-year rule mandated by the SECURE Act. You must fully empty the account within 10 years, which lets you withdraw measured amounts yearly to manage your tax brackets.
• If you inherited a costly or poorly performing contract: Consider a 1035 exchange to move the funds tax-free into a better, lower-cost annuity or an inherited IRA, provided there are no heavy surrender charges.

You generally pay $0 in federal tax on a $100,000 inheritance, but you might owe state inheritance tax depending on where you live and your relationship to the person who died.

Federal Taxes

• Income tax: The federal government does not count cash inheritances as taxable income.
• Estate tax: The tax is paid by the estate itself before you receive the money, and the 2026 federal exemption is $15 million per individual.

State Inheritance Taxes

• Most states do not have an inheritance tax.
• Only five states levy an inheritance tax on the recipient: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
• Spouses are exempt in all five states. Children and close relatives are also exempt or taxed at very low rates in most of these states, though distant relatives or unrelated heirs face rates ranging from 1% to 16%.

If the designated beneficiary of an annuity dies after the annuity owner (the annuitant) passes away, the remaining funds or payouts typically go to the contingent beneficiary or the beneficiary's own estate, depending on how the contract and payout were structured.

What Determines Where the Money Goes?

• Contingent Beneficiary: If the primary beneficiary passed away, the insurance company looks to see if a secondary (contingent) beneficiary was named on the contract. If a contingent beneficiary is listed, they inherit the remaining funds or payouts.
• The Beneficiary’s Estate: If no contingent beneficiary was named, the remaining value of the annuity or the remaining guaranteed payments generally become part of the deceased primary beneficiary's estate. They are then distributed according to their will or state law through probate.
• Type of Payout Option Chosen:
  • If the primary beneficiary chose a lump-sum payment and died before collecting the check, the money goes directly to their estate.
  • If they chose periodic payments (such as a period-certain guarantee) and passed away before all guaranteed payments were made, the remaining scheduled payments transfer to the contingent beneficiary or the primary beneficiary’s estate for the rest of the fixed term.

You can learn more about how choices impact payouts through the Annuity Beneficiary Guide.