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How to Name a Beneficiary on an Annuity

November 26, 2018

As the owner of your annuity, you will likely name yourself as the annuitant. In rare cases, you may name someone else if you want to extend the payments and tax savings. When the annuitant passes away, beneficiaries named by the owner of the annuity in advance inherit the payments. The owner can choose multiple beneficiaries and change beneficiaries whenever he or she wants. Additionally, beneficiaries can be both people and organizations.

After the owner of an annuity dies, beneficiaries will divide the inheritance into shares and distribute it by percentage. If a beneficiary is not named, the estate must go through probate, which is costly and extends the process of receiving the inheritance.

Additionally, assets of the annuity could be forfeited to the insurance company in probate court. In many policies, a spouse can become the annuitant and maintain a tax-deferred status. They can then name their own beneficiaries and receive all remaining payments and death benefits. Non-spouse beneficiaries cannot change the terms of the agreement.

How Are Annuity Beneficiaries Taxed?


In short, annuity beneficiaries pay the difference between the value of the annuity and the principal paid into the annuity. Beneficiaries have different options depending on the payout option they choose.

Lump sum payout: The beneficiary will owe taxes immediately as the annuity payments have been paid out. This will be the option with the highest tax consequences.

Five-Year Withdrawal Period: A beneficiary can decide to withdraw the money over a five-year period. In this scenario, they will only owe taxes on the portion withdrawn, so they are less likely to be taxed more because they are in a different tax bracket.

Death Benefits for Life: A beneficiary can elect to have death benefits over his or her life expectancy. Although this means the beneficiary won’t receive all of the benefits for an extended period of time, the tax exposure is the lowest as well.

What If a Beneficiary Doesn’t Want to Deal with the Tax Exposure?


If a beneficiary doesn’t want to deal with the tax implications or doesn’t want payments over an extended period of time, beneficiaries can sell an inherited annuity for cash now. Third-market buyers are out there and may pay top dollar on inherited annuity payments. We encourage you to contact us today to find vetted and reputable annuity buyers who can provide you with a quote on your annuity payments.

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