Tax consequences for beneficiaries
Every annuitant has to name a beneficiary to pass on his annuities in the event of his death. Tax implications on the beneficiary differ depending on whether the annuitant dies during the accumulation or the annuitization stage.
If the annuitant dies during the accumulation stage:
If the annuitant dies before the annuity contract gets converted into periodic payments, the accumulated annuity value passes on to the designated beneficiary. If the annuity is qualified, the annuity account is included in the beneficiary’s taxable income. In case it is a non-qualified annuity, the portion above the original annuitant’s contribution is included in the beneficiary’s taxable income.
If the annuitant dies after annuitization:
The beneficiary receives the remaining payments until the guaranteed period expires. He will be subjected to a similar income tax liability that the annuitant owed; that is, a portion of each payment will be subjected to tax. It is called the exclusion ratio.
If the beneficiary is a spouse:
The annuitant’s spouse can take advantage of special exceptions in death benefit distribution rules and can choose to receive a lump sum death benefit or continue the contract as a new annuitant. The special exceptions allow the spouse to delay tax payments on the accumulated annuity amount until he or she dies.