If you are lucky enough to inherit an annuity from a parent, there are some things that you should know before you start withdrawing money. First, annuities are usually set up so the payouts continue for a predetermined number of years or until death occurs. This means that if you withdraw all of your funds immediately, it is possible that they won’t last as long as initially expected. One way around this is to take out just enough money each year, so there will still be funds left over when the payout period ends.
- What Happens To An Annuity After A Parent Dies?
- Death Benefits Before And After Annuitization
- Annuities With And Without Death Benefits
- Annuity Inheritance Payout Options
- Will I Have To Pay Taxes On The Annuity I Inherited From My Parent?
- How To Reduce Paying Taxes On An Inherited Annuity
- The Beneficiary is a Minor
- How To Find A Missing Annuity Death Benefit
- Next Steps
- Frequently Asked Questions
- Request A Quote
What Happens To An Annuity After A Parent Dies?
The death benefit paid through an annuity contract depends on whether the contract owner/annuitant (parent) passes away before or after the annuitization of the annuity (start date). Any payment payable to a beneficiary will be subject to the type of annuity chosen and any refund provision or guarantee period if death occurs after the annuity starting date.
Lump-Sum
If children are named beneficiaries, they are limited to distributions:
- in a lump sum within five years of death or
- under lifetime periodic payments beginning within one year after the death.
Annuity Payouts
When the parent dies, the annuity payments generally will cease. However, some annuitized payouts include a death benefit clause that allows the owner to name someone to receive any remaining installments.
Related Article: Why Would My Dad Need My Name to Set Up An Annuity?
Death Benefits Before And After Annuitization
Annuitization is typically optional with modern deferred annuities. These are the options for children beneficiaries before and after the annuity was annuitized.
If Parent Dies Before Annuitization
If an annuitant (parent) dies before annuitization begins, the beneficiaries (children) will receive either the annuity’s value in a lump sum or a series of payments.
If Parent Dies After Annuitization
If an annuitant (parent) dies after annuitization begins, the beneficiaries (children) will receive either the remaining annuity payments or nothing, depending on the annuitant’s choice of an annuity payout.
| Dies Before Annuitization | Dies After Annuitization |
|---|---|
| Lump-Sum Distribution | Series of Payments |
| Spousal Continuance | No Death Benefit |
Annuities With And Without Death Benefits
| Variable Annuity | Fixed Index Annuity | Fixed Annuity | Immediate Annuity | Deferred Income Annuity | |
|---|---|---|---|---|---|
| Principal Protection | No | Yes | Yes | Yes | Yes |
| Access To Principal | Yes | Yes | Yes | No | No |
| Control Over Money | Yes | Yes | Yes | No | No |
| Tax-Deferred Growth | Yes | Yes | Yes | No | No |
| Guaranteed Growth | No | Yes | Yes | No | No |
| Guaranteed Income | Yes | Yes | Yes | Yes | Yes |
| Inflation Protection | Yes | Yes | No | Yes | Yes |
| Death Benefit | Yes | Yes | Yes | Yes/No | Yes/No |
| Long-Term Care Help | Yes | Yes | Yes | No | No |
Annuity Inheritance Payout Options
If a child inherits an annuity from their parents, they have three ways to get it.
Lump-Sum Distribution
A lump-sum distribution is when the beneficiary gets the remaining annuity’s value in one payment.
Nonqualified-Stretch Provision
A nonqualified stretch provision will give beneficiaries the payments they are entitled to based on life expectancy.
Five-Year Rule
An annuity’s beneficiary has five years to take out the proceeds. After that, they can take them out gradually or in a single lump sum anytime, as long as they withdraw all of the death benefits within five years of the annuitant’s death.
Will I Have To Pay Taxes On The Annuity I Inherited From My Parent?
Annuities are taxed as ordinary income when inherited. The proceeds of inheritance are taxable.
If a beneficiary opts to receive the money all at once, they must pay taxes immediately. This is only if you take a lump sum.
If a beneficiary takes the money over time, no taxes are owed until the annuity is cashed.
Inherited Qualified Annuities
All inheritable qualified annuities, usually IRA ones, are subject to income taxes (100% of the assets).
Inherited Nonqualified Annuities
All inheritable nonqualified annuities are subject to income taxes on interest earned only.
How To Reduce Paying Taxes On An Inherited Annuity
When you inherit an annuity, you can’t avoid paying taxes altogether. However, there are steps you can take to reduce your tax burden.
- Bonus annuities: A child beneficiary can reinvest the inheritance with a deferred annuity that offers a premium bonus. The bonus will offset the taxes owed.
- Enhanced Death Benefits: A living parent can now purchase an annuity with an enhanced death benefit to offset their beneficiary’s future taxes when they die.
- Life Insurance: A living parent can use withdrawals from the annuity to pay for life insurance in which the proceeds will be tax-free to the children.
The Beneficiary is a Minor
Suppose a parent names a child the primary or contingent beneficiary under that owner’s state’s Uniform Transfers to Minors Act. In that case, the child’s money will be placed in a custodial account for that child’s benefit to a certain age.
Suppose a parent dies and leaves money to a child directly or names that child as a beneficiary of a life insurance policy or a retirement account (annuity). In that case, a court must appoint a property guardian to manage that child’s money eighteen.
Every state has its own set of rules, so please check with the state.
How To Find A Missing Annuity Death Benefit
If parents do not disclose all financial sources to their children, beneficiaries can find lost death benefits from annuities by contacting the National Association of Insurance Commissioners. You can do this with a death certificate from the funeral home that conducted the burial or cremation. The process could take up to 90 business days. Be prepared to have as much personal information about the person who died, like their name, social security number, date of birth, etc.
Helpful Tip: If you need a cheap service to set up your entire estate plan, we recommend:
Next Steps
In conclusion, if you’re fortunate to have an annuity from a parent or loved one, consider these measures to ensure your payout lasts. Do not withdraw all the money at once; instead, use yearly payments to make it last until the predetermined period ends. Additionally, since interest rates constantly fluctuate, it is wise to compare different annuities to obtain the best terms. If you want to find the best annuity for you and your family, take advantage of our free quote service today and let us find the perfect plan for your future. With these steps in place, you can rest assured that your plan will remain stable as you enjoy its benefits for years.
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Frequently Asked Questions
What is the best thing to do with an inherited annuity?
Inheriting an annuity is a significant financial decision, so what should you do? Of course, we recommend keeping the annuity to ensure long-term security; however, other options include taking a one-time or multiyear payout, participating in a nonqualified stretch, rolling the money into an inherited IRA, or carrying out a 1035 exchange. Whichever option best suits your needs and budget will be ideal for intelligent investments.
Do heirs inherit annuities?
You can give your children an inheritance bequeathed to them by naming one of them as the beneficiary for a funded or increased annuity payout. If you prefer, you can reinvest your inherited annuity into another policy to fund it further. Your heirs can take out their death benefit from an annuity as a single lump sum payment or receive periodic payouts over time.
Can an inherited annuity be rolled into an IRA?
If you’re lucky enough to inherit a qualified annuity, consider rolling it into an inherited IRA. These accounts often charge lower fees and offer more excellent investment options than annuities. However, remember that converting the annuity could mean sacrificing its valuable guarantee of steady payments for life.
Can an inherited annuity be transferred?
In general, you cannot roll over an inherited annuity. However, there are a few exceptions. For example, if the deceased were your spouse, you could roll over the annuity into your account. This is called a spousal rollover.
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