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Q. Does the beneficiary of an annuity have to pay tax?

Posted by: Bill L.
A. Unfortunately, tax-deferred annuities are subject to income tax. In some cases where your estate exceeds allowed credits, federal estate taxes may be due as well. Upon the annuitant's death, the beneficiary becomes liable for the income tax on any gain paid out of the contract. An exception to this rule would be if the beneficiary is the owner's spouse. The surviving spouse can continue the contract without incurring current taxation. However, if the surviving spouse elects to continue the contract, then upon his/her death, the named beneficiary becomes liable for the income tax on any gain paid out of the contract. Keep in mind, the proceeds of an annuity go directly to your named beneficiary, thereby avoiding the costs, delays, and publicity associated with probate. However, one can transfer wealth efficiently to their named beneficiary by using the annuity to fund the purchase of a life insurance policy. This technique can be very effective, but you should seek professional advice before making any decisions.