Over the next two decades, an estimated $80+ trillion will transfer between generations. A meaningful portion of that wealth will arrive in the form of inherited retirement accounts and annuities.
When a client inherits an annuity, they often walk into your office with a simple question:
“What do I do with this?”
The answer depends on several factors — including the type of annuity, how it was funded, and the client’s tax situation. For advisors, these cases often create an opportunity to help clients avoid costly mistakes while repositioning inherited assets into a strategy that better fits their goals.
Let’s look at how these situations typically unfold.
When an annuity owner passes away, the beneficiary becomes responsible for deciding what happens next with the contract.
In many cases, clients may have several options available to them, including:
• Taking a lump-sum payout
• Continuing the annuity contract
• Electing scheduled distributions over time
The best path forward often depends on how the annuity was originally structured and what the client wants to accomplish with the inheritance.
Many beneficiaries assume the easiest option is simply taking the money.
But in practice, that can create a significant tax event.
For non-qualified annuities, the gain portion of the contract is generally taxed as ordinary income when withdrawn. Taking the entire value at once can push a client into a higher tax bracket.
For qualified annuities inside IRAs, inherited accounts are typically subject to the 10-year distribution rule, meaning the beneficiary must distribute the funds within ten years of the original owner’s death.
Without planning, beneficiaries may end up paying more in taxes than expected.
Instead of taking the entire amount at once, many advisors explore strategies that allow clients to spread distributions over time.
This is often referred to as a stretch distribution strategy.
Stretching payments can allow clients to:
• Spread taxable income over multiple years
• Keep remaining funds growing tax-deferred
• Create a predictable income stream
For non-qualified annuities, the taxable gain may be recognized gradually as distributions occur.
For inherited IRA annuities, distributions can often be structured within the required distribution window.
In many cases, the difference between a lump sum and a structured distribution strategy can have a significant impact on how much of the inheritance your client ultimately keeps.
When a client inherits an annuity, it’s often a good time to review whether the existing contract still aligns with the beneficiary’s financial plan.
Some advisors choose to reposition inherited annuity money into newer strategies that may offer:
• Updated crediting strategies
• Improved income options
• Greater distribution flexibility
• Legacy planning features
In certain situations, annuities that offer premium enhancements can also increase the starting value of the contract, creating a larger base for future growth or income planning.
As the wealth transfer accelerates, advisors will increasingly encounter clients who inherit retirement assets and annuities.
Handled thoughtfully, these situations can become powerful planning opportunities — helping clients manage taxes, structure income, and preserve inherited wealth.
For advisors who understand how inherited annuities work, these cases often lead to deeper client relationships and meaningful planning conversations.