As the generational wealth transfer accelerates, financial advisors are encountering more situations where clients inherit retirement assets from parents or relatives.
IRAs tend to get most of the attention in these conversations. But another asset often shows up in estate plans that many advisors aren’t as familiar with:
Annuities.
When a client inherits an annuity, the immediate question is usually simple:
“What should we do with it?”
For advisors who understand how inherited annuities work, these situations can become valuable planning opportunities — particularly when it comes to managing taxes and structuring distributions over time.
When beneficiaries inherit an annuity, the most common reaction is to simply take the money.
After all, it feels like a windfall.
But lump-sum withdrawals can create unintended consequences.
For non-qualified annuities, the gain portion of the contract is generally taxed as ordinary income when withdrawn. Taking the entire amount at once can push beneficiaries into higher tax brackets.
For qualified annuities held inside IRAs, the IRS now generally requires inherited accounts to be distributed within 10 years of the original owner’s death.
Without planning, these withdrawals can create significant tax exposure.
Instead of taking the entire amount immediately, advisors can sometimes structure distributions so the beneficiary receives payments over time.
This approach is often called stretching the annuity.
The idea is simple: rather than triggering a large taxable event all at once, distributions are spread across multiple years.
This may allow clients to:
• Manage tax brackets more efficiently
• Keep remaining funds growing tax-deferred
• Create predictable income streams
For many beneficiaries, this approach can make a meaningful difference in how much of the inheritance they ultimately keep.
Stretch strategies can vary depending on the type of annuity and the carrier’s rules.
For non-qualified annuities, beneficiaries may be able to structure distributions so the taxable gain is recognized gradually as payments are received.
For inherited IRA annuities, distributions must generally follow IRS required distribution rules, which often involve withdrawing funds within a 10-year window.
The key planning opportunity often lies in how those withdrawals are structured within that timeframe.
As inherited retirement assets become more common, advisors are increasingly reviewing inherited annuities more closely.
These situations often lead to conversations about:
• Tax bracket management
• Income planning
• Legacy preservation
• Repositioning strategies
In some cases, repositioning inherited annuity money into a newer strategy may offer features such as updated crediting methods, income flexibility, or enhanced accumulation opportunities.
Inherited annuities are becoming more common as retirement assets pass between generations.
For advisors who understand the available options, these cases often lead to deeper planning conversations and long-term client relationships.
Rather than viewing inherited annuities as a simple payout decision, many advisors are discovering that with thoughtful planning, these assets can become part of a broader strategy designed to support income, tax efficiency, and legacy goals.