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What to Do if I Inherit an Annuity

In this guide, we break down what to do if you inherit an annuity: what it means, distribution options, and how to implement it in your Estate Plan.

Inheriting an Annuity can provide guaranteed income at a time when you need it most. It can make up for the loss of income after a spouse dies, or help you get back on track after a financial setback. It can also provide new opportunities where there were few options before.

If you have inherited an Annuity and are wondering what to do next, Trust & Will has you covered. Here's everything you need to know about inheriting an Annuity:

What is an Annuity?

An Annuity is a long-term investment set up by your insurance company to help grow your retirement income. In return for your investment, you receive regular Annuity payments. An Annuity is beneficial to those who want to supplement their income through retirement. By paying into an Annuity now, you can guarantee future income.

There are two distinct types of Annuities to consider:

  • A Qualified Annuity is purchased through a tax-advantaged account, such as a 401(k) plan through an employer or individual retirement account. These are most common for retirees planning the years of their retirement. Any payments from this account are taxed, and any withdrawals made before the Annuity holder is 59 1/2 years old come with a 10% penalty.

  • A Non-Qualified Annuity is purchased with after-tax dollars. Contributions made to this type of Annuity are not taxed, but any additional earnings from your investment are subject to income tax. Unlike Qualified Annuities, there is no 10% early withdrawal penalty.

You may consider investing in an Annuity if your plans exceed what your 401(k) plan or retirement account can provide. It can also financially protect a surviving spouse after death or provide a financial legacy to children and extended family.

Most Annuity contracts include a death benefit of some kind. In the event of your death, you can name a Beneficiary to take over your account. That person, usually a spouse but can be anyone, can simply take over for the original contract holder and begin receiving regular payments from that investment. A Beneficiary might also choose to cash in on their inheritance, taking one lump sum or multiple smaller payouts over time.

If you do not have a jointly owned or survivor Annuity and no Beneficiary is listed, you risk losing it all in the event of your death. In that case, the insurance company or financial institution that purchased the Annuity on your behalf would keep any remaining benefits.

The only time that an Annuity does not have a death benefit is in the case of a Life Only Annuity. These Annuities only issue payouts during your lifetime, leaving the contract null and void after your passing.

Annuity Distribution Options

When you inherit an Annuity, you have different options for receiving your payout. While each has its advantages, it comes down to personal preference and the current state of your financial situation. Do you need a large sum of money now, whether to pay down debt or make a large purchase? Or, can you afford to wait for a small monthly payment?

These are the most common options for a Beneficiary to receive an Annuity payout:

Spousal distribution payments: This is the most common option for surviving spouses of Annuity contract holders. If your spouse received Annuity payments and passed away, you would simply establish yourself as the new Annuity owner. All previous terms and conditions, including payout amount and frequency, would stay the same.

Stretch distribution payments: Stretch distribution payments work much like spousal distribution payments do. You would still receive the remainder of the funds left on a Decedent's contract on a set schedule throughout the remainder of your life. But instead of receiving the same amount as they did on their schedule, your life expectancy sets the basis for your payment amount and schedule.

Lump-sum payout: If your loved one bought a $500,000 Annuity and $250,000 remained at the time of their death, you may choose to receive that money all at once. This option is best for those who want to make a large purchase after inheriting money, opening up opportunities that may not have been possible for them before, such as a new family home or funding another investment or Annuity.

Payout over time: Rather than receiving your Annuity payments on a set schedule throughout your lifetime or in one large lump sum, there is another, more middle-of-the-road option, giving you more opportunity to plan for the future. You can choose to receive your payout in smaller incremental payouts and then one final, lump-sum payment. This is a beneficial option for those who may not need money right away but plan to make a large purchase, pay down debt, or send their kids to school in a few years. This option gives Beneficiaries up to five years to withdraw all funds.

Annuitized payments: This is a customized payment option. Annuitized payments also pay out over time, but you set the schedule. This allows you the freedom to plan your finances if you find other sources of income drying up during a particular time. When setting up annuitized payments, keep in mind that once the payment schedule is set, it cannot be changed.

Plan for the Future with Trust & Will

Annuities provide a unique way to grow your retirement fund. They ensure that you can provide for yourself throughout your life and for your family, should something happen to you.

If you have an Annuity contract with a life insurance agency, it's vital to make sure it gets into the right hands in the event of your death. If you haven't already, name a Beneficiary to the death benefit of your Annuity. And don't forget to include your Annuity in your Will or Trust. Trust & Will can help you update or create an Estate Plan online in as little as 15 minutes.

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