Annuity beneficiary tax treatment describes how distributions from an annuity are taxed when paid to beneficiaries after the ownerTMs or annuitantTMs death. For nonqualified annuities, beneficiaries generally owe ordinary income tax on the growth portion of distributions, while basis is recovered tax-free. Payouts may be taken as lump sums, systematic distributions, or in some cases, as annuitized streams, each with different timing and tax implications. Post-SECURE Act rules impose 10-year distribution requirements on many non-spouse beneficiaries of qualified annuity contracts, changing how required minimum distributions and stretch strategies work. The tax treatment depends on contract type, ownership structure, beneficiary status, and payout option, making clear guidance crucial.

Advisors explain annuity beneficiary tax treatment when clients name beneficiaries, consider using annuities for legacy purposes, or when heirs inherit existing contracts. They work with CPAs to evaluate whether beneficiaries should take lump-sum distributions, spread income over several years, or use available annuitization options to manage tax brackets. Advisors also explain that unlike life insurance death benefits, many annuity death proceeds are not tax-free, which can surprise heirs. In advanced planning, they may recommend using life insurance instead of nonqualified annuities for pure legacy goals. Understanding annuity beneficiary tax treatment allows advisors to set realistic expectations, avoid avoidable tax friction, and design beneficiary payout strategies that are both compliant and tax-efficient.