What Happens When an Annuity Owner Dies?

by | Apr 30, 2014 | Podcasts, Financial Planning

Most investors are pitched on the “advantages of investing in an annuity”, but neglect to find out what happens in the end game. It’s not something pleasant to discuss, but what happens when an annuity owner dies? Tom and Brendan cover this frequently asked question in their weekly podcast.

When a single owner of an annuity passes away, a chain of events is set into motion. The proceeds of the annuity will pass to their named beneficiary (or beneficiaries). The annuity will not be included in their estate. Since the beneficiary is not the person who purchased the annuity, there tends to be a lot of confusion about what will happen to the money.

The first thing the beneficiary needs to know is that the annuity will be taxed on any gains made above the original owner’s investment. Additionally, the gains will be taxed at ordinary income rates (as if they earned it), not capital gains rates. This comes as a surprise to some individuals. We found a good post from The Motley Fool that explains annuity taxation. You can check it out here: (http://www.fool.com/retirement/annuities/annuities01.htm)

The beneficiary has options when it comes to taking their payment. It’s usually a good idea to consider any tax ramifications the annuity may cause before making a decision. They may choose to annuitize and receive monthly distributions, receive partial lump sum payments, or receive one lump sum payment. A  decision regarding the distribution method must be made prior to the fifth anniversary of the original owner’s death.

Tom and Brendan also talk about annuities with joint owners. When an annuity has joint owners, proceeds will not pass to the beneficiary until both owners have passed away. In a scenario where only own annuity owner has passed away, the other will become the sole owner of the annuity until their death. When they have both passed away, the proceeds will be passed to the beneficiaries in the same manner discussed above for single annuity owners.

Check out this week’s podcast to hear the entire discussion between Tom and Brendan!

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