What are the distribution options for an inherited annuity?

Retirement Savings, Annuities
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June 2016
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Annuities are annuitant/owner driven, but the majority are owned by the annuitant (the person that established the contract), versus a trust. In general, there are four options available for a beneficiary (is a person but not a spouse):

  1. The beneficiary receives a death benefit after the annuitant passes away (lump sum);
  2. The beneficiary takes a minimum distribution based on their life expectancy (also known as the "non-qualified stretch");
  3. The beneficiary may take discretionary amounts during a 5-year period or wait until the 5th year and take the death benefit all at once (also known as the "5-year rule");  or
  4. The beneficiary may take a single life or period certain option (annuitize).

If the beneficiary is not a person (such as a trust, charity, or the estate), it must be distributed in a 5-year period. On a side note, it is always best not to name the estate as the beneficiary since the primary objective of the annuity is to bypass probate (and you are doing so by leaving it to the estate).

In regards to a spouse, the most common is a spousal continuation, however, the above options are also available.

If you have any further questions, I'd be happy to help.

February 2009