Yes, annuities can be inherited, but what your beneficiary receives depends on the type of annuity you own and the options you chose when you bought it.

Most annuities allow you to name a beneficiary who will receive remaining funds or payments after your death. However, some annuity structures pay out only while you live, leaving nothing for heirs. The difference between these outcomes is set when you purchase the annuity, so understanding your choices now affects what your family actually gets later.

The amount your beneficiary inherits, how they receive it, and the tax bill they face all depend on three things: the annuity type (when ready or deferred), the payout option you selected, and whether the annuity is may have access to (held in a retirement account) or non-may have access to (held outside one).

Key Takeaways

  • Annuities with a "period certain" or "life with period certain" option pass remaining payments to your beneficiary; annuities with "life only" do not.
  • Your beneficiary typically receives a lump sum or continues receiving the monthly payments you were getting, depending on what the annuity contract allows.
  • Inherited non-may have access to annuities are taxed on the gain (earnings) only, not on your original contribution; inherited may have access to annuities are taxed as ordinary income.
  • The new find Act rules require most beneficiaries to withdraw all funds from inherited may have access to annuities within ten years, which can create a large tax bill in year ten.
  • Naming a specific person as beneficiary overrides your will, so update your annuity beneficiary form if your circumstances change.

How annuity payout options affect inheritance

When you buy an annuity, you choose how the insurance company pays you. That choice determines whether anything is left for your heirs. The most common options are:

Life only: The insurance company pays you for as long as you live, then stops. Your beneficiary receives nothing. This option gives you the highest monthly payment because the company keeps any money left over if you die early.

Life with period certain (10, 15, or 20 years): You receive payments for life, but the insurance company guarantees payments for a set number of years regardless. If you die before that period ends, your beneficiary receives the remaining payments. For example, with a 10-year period certain, if you die in year 7, your beneficiary gets payments for 3 more years. Your monthly payment is lower than life-only because the company has a may provide payout obligation.

Joint and survivor: Payments continue to your spouse (or named survivor) for their lifetime after you die. This option is common for married couples but produces the lowest monthly payment because two lives are covered.

Term certain (10, 15, or 20 years): The company pays for a fixed period only. If you die before the period ends, your beneficiary receives the remaining payments as a lump sum or continued installments. If you live past the period, payments stop.

What your beneficiary actually receives

The form of inheritance depends on your annuity contract and the payout option you chose. Most contracts offer your beneficiary one or more of these choices:

Lump sum: Your beneficiary receives all remaining value in one payment. This is the fastest option but can create a large tax bill in a single year, especially for may have access to annuities.

Continued payments: Your beneficiary receives the same monthly or annual payments you were getting, for the remainder of the may provide period. This spreads the tax bill over time and may be easier to manage.

Annuitization: Some contracts allow your beneficiary to convert the remaining balance into their own annuity, which can defer taxes further. This is less common and depends on the specific contract.

Your annuity contract spells out which options are available. If you no longer have the contract, contact the insurance company directly with your policy number; they can tell you what your beneficiary's choices will be.

Tax treatment for inherited non-may have access to annuities

A non-may have access to annuity is one you bought with after-tax money outside a retirement account. When you inherited it or when your beneficiary inherits it, taxes explore only to the earnings (gain), not to your original contribution.

If you bought the annuity for $100,000 and it grew to $150,000, your contribution basis is $100,000. Your beneficiary owes income tax only on the $50,000 gain. The $100,000 passes tax-free. This is called the step-up in basis rule: your beneficiary's cost basis becomes the value on the date of your death, so any gain that happened before you died is not taxed.

If your beneficiary takes a lump sum, they owe tax on the gain in the year they receive it. If they take continued payments, they owe tax each year on the portion of each payment that represents earnings. The insurance company will send them a 1099-R form showing how much of each payment is taxable.

Tax treatment for inherited may have access to annuities

A may have access to annuity is one held inside an IRA, 401(k), or other retirement account. The entire amount your beneficiary receives is taxed as ordinary income, because you never paid tax on the money when you contributed it.

The find Act (passed in 2019) changed the rules significantly. For most beneficiaries, the old "stretch IRA" option—spreading withdrawals over your lifetime—is no longer available. Instead, most non-spouse beneficiaries must withdraw all funds within ten years of your death. They can take the money out whenever they want during those ten years, but the account must be empty by the end of year ten.

This creates a timing decision. Your beneficiary could withdraw small amounts each year to spread the tax bill, or wait until year ten and take a large lump sum. Either way, they owe ordinary income tax on everything they withdraw. Taking a large withdrawal in year ten could push them into a higher tax bracket.

Surviving spouses have more flexibility. A spouse can treat the inherited IRA as their own, roll it into their own IRA, or take distributions under the ten-year rule. This gives spouses more control over the timing and amount of taxable withdrawals.

Updating your beneficiary designation

Your annuity beneficiary form is a legal document separate from your will. Whatever you name on the annuity contract goes directly to that person, regardless of what your will says. If you divorce, remarry, or your circumstances change, you need to update the form with the insurance company.

Contact your insurance company or financial advisor and request a beneficiary change form. You will need to provide the new beneficiary's full name, date of birth, and Social Security number. Some companies allow you to name multiple beneficiaries and specify what percentage each receives.

If you name your estate as beneficiary (instead of a person), the annuity goes through probate, which is slower and more expensive. Most financial advisors recommend naming a specific person or a trust instead.

When to consider a trust as beneficiary

Naming a trust as your annuity beneficiary can make sense if you want to control how the money is used after you die—for example, if your beneficiary is a minor, has a disability, or tends to spend money quickly. A trust can require the trustee to hold the funds, invest them, and distribute them according to your instructions.

However, trusts complicate the tax picture. A trust that receives an inherited may have access to annuity may face compressed tax brackets, meaning the tax bill is higher than if the beneficiary inherited it directly. You should discuss this with both a tax professional and an estate attorney before naming a trust.

If you do use a trust, make sure the trust document is named correctly on the annuity contract. The insurance company needs the exact legal name and the trustee's information.

Frequently Asked Questions

What happens if I don't name a beneficiary on my annuity?

If you die without naming a beneficiary, the annuity becomes part of your estate and goes through probate. This is slower and more expensive than a direct beneficiary transfer. Your heirs will eventually receive the funds, but it may take months and cost thousands in legal fees. Update your beneficiary form as soon as possible.

Can my beneficiary refuse to inherit the annuity?

Yes. Your beneficiary can disclaim (refuse) the inheritance, which passes it to the next person named on the contract or to your estate. This is rare but can make sense if accepting the annuity would push them into a much higher tax bracket or affect their may be able to access for means-tested benefits. They must disclaim within nine months of your death and should consult a tax professional first.

Is there a way to avoid the ten-year withdrawal rule for my beneficiary?

The ten-year rule applies to most non-spouse beneficiaries of may have access to annuities under current law. A surviving spouse can avoid it by treating the inherited IRA as their own. Certain "may be able to access designated beneficiaries"—such as disabled or chronically ill individuals, or beneficiaries less than ten years younger than you—may may have access to for different rules. Consult a tax professional to see if your beneficiary qualifies.

Do I owe taxes when I name a beneficiary on my annuity?

No. Naming a beneficiary is a free, tax-free action. Taxes are owed only when your beneficiary actually receives money after you die. The act of naming them creates no tax event.

What if I want to change my payout option after I've already bought the annuity?

Some annuities allow you to change your payout option before you start receiving payments, but many do not. Once you begin receiving payments, your choice is usually locked in. Check your contract or call the insurance company to ask whether a change is possible. If you want different terms, you may need to surrender the annuity (which could trigger surrender charges and taxes) and buy a new one.