Annuities and Estate Planning

Annuities pass to beneficiaries differently from other retirement vehicles. The interaction with estate planning has three structural features: bypass of probate via beneficiary designation, special tax treatment under §691, and SECURE Act distribution rules that affect non-spouse inheritors.

This article covers what to know before integrating an annuity into an estate plan.

Beneficiary designation overrides the will

Annuity beneficiary designations are contractual and take precedence over a will. A will that says “everything to my children” does not override an annuity beneficiary designation that names an ex-spouse.

This is true for almost all named-beneficiary assets: IRAs, 401(k)s, life insurance, annuities, transfer-on-death brokerage accounts. The will only governs probate assets that have no beneficiary designation.

Action item: review all annuity beneficiary designations every 3-5 years and after any major life event (marriage, divorce, birth, death, change in financial situation of a named beneficiary).

Spousal continuation

A surviving spouse named as beneficiary has the strongest options:

• Non-qualified annuity. Spouse can continue the contract in their own name. Deferral continues. No immediate tax.
• Qualified annuity. Spouse can roll the qualified annuity into their own IRA, continuing deferral. Or take inherited-IRA distributions on their schedule.

Either path preserves the contract’s tax-deferral feature and avoids triggering income tax in the year of the owner’s death.

Non-spouse beneficiaries: the SECURE Act 10-year rule

For qualified annuities inherited by non-spouse beneficiaries, the SECURE Act of 2019 eliminated the “stretch IRA” option. Most non-spouse beneficiaries must now distribute the entire balance within 10 years of the owner’s death.

Exceptions (“eligible designated beneficiaries”):

• Minor child of the original owner (clock starts at majority)
• Disabled or chronically ill beneficiary
• Beneficiary not more than 10 years younger than the original owner
• Surviving spouse (full rollover available)

For the typical adult child inheriting a parent’s IRA-funded annuity, the 10-year rule applies. The beneficiary can take distributions at their own pace within the 10 years (no annual RMD requirement during the period), but must zero out the account by the end of year 10.

This compresses the taxable income from the inheritance into a 10-year window. For a beneficiary in their peak earning years, the additional income can push them into higher tax brackets.

Non-qualified inherited annuities

A non-qualified annuity inherited by a non-spouse beneficiary uses different rules under §72(s):

1. Lump sum. Full death benefit paid immediately. Gain is taxable.
2. 5-year rule. Full distribution within 5 years.
3. Life expectancy stretch. Distributions over the beneficiary’s life expectancy. Each payment is split into return-of-basis (non-taxable) and gain (taxable) portions.

The life expectancy stretch was preserved for non-qualified annuities by the SECURE Act. This makes non-qualified annuities one of the few retirement vehicles still allowing the stretch for non-spouse beneficiaries.

The beneficiary must elect the stretch within 12 months of the owner’s death. Defaulting past the deadline locks in the 5-year rule.

Trust as beneficiary

Naming a trust as annuity beneficiary is legally allowed but tax-complex. The trust receives the death benefit. The trust’s terms then determine how proceeds flow to underlying beneficiaries.

Considerations:

• The trust must qualify as a “see-through trust” under IRS rules for the underlying beneficiaries’ life expectancies to apply
• Most trusts must distribute proceeds within 5 years for non-qualified annuities (without the §691 treatment available for individuals)
• Qualified annuity rules under the SECURE Act apply

Trust-as-beneficiary is appropriate for:

• Beneficiaries who cannot manage funds directly (minors, disabled)
• Asset protection from beneficiaries’ creditors or divorce
• Generation-skipping transfer planning

It is not appropriate when the trust’s structure causes earlier distribution than would otherwise occur. Specific elder law or estate planning attorney consultation is required.

§691 income in respect of a decedent (IRD)

The deferred gain in a non-qualified annuity is “income in respect of a decedent” (IRD) under IRC §691. The IRD doctrine produces a tax interaction that benefits beneficiaries of large estates.

If the deceased owner’s estate paid federal estate tax (estates over $13.6M in 2026), the beneficiary receives an income tax deduction for the portion of estate tax attributable to the annuity’s deferred gain. This prevents the same dollar from being subject to both estate tax AND ordinary income tax.

For most beneficiaries (estates under the federal exemption), this provision doesn’t apply. For beneficiaries of larger estates, the §691(c) deduction can be meaningful and is often missed by less-specialized tax preparers.

Estate tax interaction

The death benefit value of an annuity is includable in the gross estate for federal estate tax purposes. For most estates, this doesn’t matter (well under the federal exemption). For larger estates, the death benefit’s inclusion affects the estate tax calculation.

State estate taxes have lower exemption thresholds in several states. The annuity’s death benefit is also typically included in the state estate tax base.

For estates that may approach the state or federal exemption, the annuity’s structure (qualified vs non-qualified, beneficiary designation, ownership) affects estate tax liability. Coordinated planning with an estate attorney is recommended.

Practical recommendations

For most retirees with annuities in their portfolio:

1. Designate primary AND contingent beneficiaries on every annuity contract. Always.
2. Review designations every 3-5 years. Marriage, divorce, birth, death of a beneficiary, or significant change in a beneficiary’s situation all warrant review.
3. For married couples, name spouse as primary beneficiary. Preserves the strongest continuation option.
4. For non-spouse beneficiaries, discuss the SECURE Act 10-year rule. They may need to plan how to absorb the taxable income.
5. Coordinate with the overall estate plan. The annuity should not be a standalone decision; it interacts with the rest of the estate structure.

For tax-specific context, see how annuities are taxed and annuity beneficiary rules.