An annuity is a contract between the investor and insurance company. The annuity owner deposits a lump sum or makes payments to the insurer in exchange for periodic payments, either immediately or in the future. With a fixed annuity, the rate stays consistent. Inheriting an annuity can provide you extra income, but it will also result in a higher tax bill for the year you choose to withdraw the money. Annuities offer different disbursement options for beneficiaries who don't want to keep the annuity in their names.
There are two different types of fixed annuities. With a deferred fixed annuity, a guaranteed amount of interest accumulates inside the annuity until the recipient begins collecting payments. For someone who doesn't have a lot of cash on hand to tie up, a deferred annuity allows you to build by making payments. Earnings are tax deferred until the money is withdrawn. An annuity is primarily designed to be a retirement savings account, therefore, the recipient may face penalties if withdrawals are made before age 59 1/2. Funds can be withdrawn in a lump sum or paid in a steady stream of payments. Unlike a deferred annuity, an immediately annuity begins paying right away. The insurance company issues checks on a monthly, semi-monthly, quarterly or semi-annual basis. This option is best for investors who would like to receive income from investing a lump sum of money.
When you inherit an annuity, you must file a claim for benefits with the issuing insurance company. The insurance company will verify you are the beneficiary and mail you paperwork to complete. You will need to provide the annuity number, the deceased's information including the Social Security number, and your basic information. Along with the paperwork, return a copy of the death certificate.
An annuity can be disbursed in several different ways. You must let the insurance company know which option you prefer. Beneficiaries don't face surrender charges, which means that you will not face penalty fees for receiving the money before the contract ends. Although you have the choice to take over the annuity and receive month payments for the rest of your life, you can also get rid of the annuity. You can select to receive all the funds in a single lump sum payment. Another option is distributing the funds within five years of the owner's death.
Beneficiaries are responsible for paying taxes on money the annuity earned. The difference between the amount the former owner opened the account with and the ending balance is the taxable amount. Since your disbursement will affect your income taxes, choose carefully. The five-year plan can allow you to divide the funds over the next few years in case the lump sum puts you in a higher tax bracket.