Inherited Annuities
Inherited annuities can provide financial relief for a beneficiary, but may also carry tax implications. Learn your options for managing this financial asset.
What Is an Inherited Annuity?
An annuity is a financial investment designed to protect financial assets and ensure stability over a set period of time. Some annuities feature a death benefit that allows a beneficiary to receive an annuitant's payments following their death.
If the annuitant happens to die before the term of their annuity contract ends, the designated beneficiary will inherit the annuity investment in the form of consistent monthly, quarterly or yearly payments.
Two Types of Inherited Annuities:
Qualified Annuity
Connected to retirement plans (pensions, 403(b), IRAs) and paid with pre-tax dollars. Spouses can roll assets into another plan. Non-spouses receive a lump sum or set up a separate IRA.
Non-Qualified Annuity
Purchased outside work-related retirement plans using after-tax dollars. Already subject to income tax, but interest earned will be taxed upon withdrawal.
How Does an Inherited Annuity Work?
For an added fee, annuitants can purchase a death benefit rider, which is an attachment to the original annuity contract. Annuitants will receive payments from their annuity for the term of their contract.
If the annuitant dies before the contract ends, and they have a death benefit, their beneficiary will receive their payments in the original annuitant's stead.
Distribution Options
Beneficiaries inheriting an annuity have several options for receiving disbursed payments.
Lump Sum Payment
Receive the full death benefit as a one-time payment upon the annuitant's death. Provides flexibility to pay off debt and larger expenses at once.
Five-Year Rule
Receive the full distribution within five years of the annuitant's death. You can take smaller amounts during this period or the full amount at any point.
Nonqualified Stretch
Receive minimum distributions through yearly payments based on your life expectancy. You can control when payments are disbursed and name your own beneficiary.
Periodic Payments
Choose single-life or term-certain annuitization. In single-life, payments continue until death. In term-certain, payments last for a fixed period.
Are Inherited Annuities Taxable?
Spouse Beneficiary
If the beneficiary is a spouse, they can carry on with the original annuity contract without any immediate tax implications.
Non-Spouse Beneficiary
Taxes depend on payout choice. Lump sum means taxes on interest earned. Continued payments means each payment is taxed individually, spreading liability over time.
Important: An annuity is considered a financial asset in the deceased's estate and is subject to estate tax. The annuity beneficiary will be responsible for paying this estate tax.
Selling an Inherited Annuity
While receiving regular payments may be beneficial, some inherited annuitants may choose to sell their annuity to pay for emergency expenses, tuition, or to alleviate debt.
Partial Sale
Sell a period of your annuity disbursement or a portion of each payment. For example, sell several years of payments in exchange for a lump sum, then continue receiving remaining payments afterward.
Full Sale
Sell all continual payments through the term of the annuity contract. In exchange, you'll receive a one-time lump sum payment for immediate access to your funds.
If you have an inherited annuity and are interested in selling it, CBC Settlement Funding can provide you with cash now. Our experienced team will walk you through the process and answer any questions you may have.
Learn About Selling Your AnnuityLet CBC Help
Our team of experienced, caring professionals will make the process of selling some or all of your structured settlement or annuity payments easy.