Kids Inheriting an Annuity? Here's How to Handle the Money
Two brothers stand to inherit a $30,000 annuity from their grandmother. A financial expert breaks down the five-year withdrawal rule and smartest next steps.
Two minor sons are set to inherit a $30,000 annuity left behind by their grandmother, raising an important question many families face but few are prepared for: what is the smartest way to handle an inherited annuity on behalf of a child beneficiary?
Under current rules, non-spouse beneficiaries who inherit an annuity — including minors — are generally required to withdraw the funds within five years of the original owner's death. That compressed timeline creates both a tax planning challenge and an investment opportunity that families should address promptly rather than letting the clock run without a strategy.
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The tax dimension matters significantly here. Withdrawals from an inherited annuity are typically treated as ordinary income in the year they are taken, which means spreading distributions across the five-year window rather than taking a lump sum could help minimize the annual tax hit — especially if the children have little or no other income, potentially keeping them in a lower bracket.
Once the money is withdrawn, families have several paths forward. Depositing the proceeds into custodial accounts — such as UGMA or UTMA accounts — allows a parent or guardian to invest on the child's behalf until they reach the age of majority. Alternatively, if higher education is the goal, rolling distributed funds into a 529 college savings plan could provide tax-advantaged growth for future tuition costs, though contribution limits and gift-tax rules would apply.
Financial advisors generally recommend consulting both a tax professional and an estate planning attorney before making any moves on an inherited annuity, since state laws and specific contract terms can alter the options available. Acting early gives families the most flexibility. Continue reading at MarketWatch.com
