Do Annuities Go Through Probate?

Annuities typically do not go through probate when they are inherited because most annuity owners name a designated beneficiary. However, they may still be subject to probate if there is no named beneficiary, or if the beneficiary is no longer alive.

Probate is the formal legal process of administering a person’s estate after they die. It can be a long, complicated process, so many people try to set up their estates to avoid probate.

Annuities are a useful tool in that sense. Almost all of them offer death benefits, where any remaining money that is owed to an annuitant can be passed on to a designated beneficiary without going through the probate process.

In this article, we explain what probate is, how annuities can help you avoid probate, and when probate may still be necessary.

What is Probate?

Probate is the process in which you distribute the assets of a person who has died. These assets can be funds in bank accounts, real estate, and other financial investments.

An administrator, called an “executor,” is set up to carry out this work, which involves collecting the deceased's assets to pay off any debts remaining on their estate and distributing the remaining assets to their beneficiaries — the people who will receive the assets. That could include their spouse, children, friends, charities, and so on.

Many people want to avoid probate, for several reasons:

• It’s expensive. Probate is a legal process, and can require many different legal services. Those can be expensive.
• It can be stressful. Estate administration happens after someone has passed away. That means it happens during times of loss. During this stressful time, family conflicts can arise, especially when it involves money.
• It’s public. The proceedings of probate court are publicly recorded, which means anyone can access the details of a person’s estate in probate. Avoiding probate helps families transfer assets and settle a will privately.
• It’s time-consuming. The process of administering an estate can take a long time to conclude, usually at least six months. This is especially the case if there are disputes over the will of the person who has died. Assets that go through probate can sometimes remain in limbo for years.

Probate can be slow, expensive, and painful — that’s why people try to use financial instruments that avoid it. Annuities are one of the financial products that are able to avoid probate.

What Types of Annuities Do Not Go Through Probate?

Any type of annuity that offers death benefits can be set up to avoid probate by naming a beneficiary. This applies to all types of annuities, including:

• Immediate annuities — annuities that begin to pay you back soon after you buy them.
• Deferred annuities — annuities that accumulate and grow over a period of time before you annuitize them.
• Fixed annuities — deferred annuities that grow at a minimum fixed rate of interest.
• Variable annuities — deferred annuities that grow at a rate of interest that’s tied to a set of investments.
• Fixed-indexed annuities — deferred annuities that blend features of both fixed and variable annuities.

Note: The type of annuity doesn’t affect whether it enters the probate process or not. Instead, what is important is whether the annuity has a designated beneficiary.

Why Do Certain Annuities Bypass Probate?

Annuities are part of a broader category of assets called “non-probate” assets that can avoid probate. This class of assets also includes:

• Trusts
• Life insurance policies
• Retirement accounts, like IRAs, 401(k)s
• Joint bank accounts with rights of survivorship
• Real estate owned as joint tenants or as tenants in the entirety
• Bank and brokerage accounts with a payable-on-death or transfer-on-death beneficiary

What these assets all have in common is that you can register a designated beneficiary for death benefits. Death benefits allow you to name a person (or people, or entity) to inherit what’s left of your annuity after you die. That could be any remaining annuity payments or the balance of your annuity account.

It’s that designated beneficiary that is the reason that the annuity avoids probate. The designation allows the asset to transfer directly from the deceased person to their beneficiary. The direct transfer occurs regardless of whether the annuity is held in an IRA or other retirement plan.

Are There any Exceptions to this Rule?

There are some circumstances under which an annuity would go through probate.

1. If there is no named beneficiary. If you buy an annuity without naming a beneficiary and you died, any value owed to you would go to your estate and likely be subject to probate.
2. If a named beneficiary had died. If a named beneficiary of an annuity had already passed away, and there were no other living beneficiaries, then the assets may be subject to probate.

One way to avoid that second scenario is to name contingent beneficiaries. A contingent beneficiary would become a beneficiary only if the primary beneficiary dies.

For example, you could name your spouse as a primary beneficiary, and then your children as contingent beneficiaries. When you die, if your spouse is not alive, then any remaining annuity payments would go to the contingent beneficiaries — your children.

Another way to avoid that second scenario is to add “per-stirpes” designations to the beneficiaries. Per-stirpes helps pass the benefits of surviving children to their surviving children.

For example, imagine you have three children and you name them as your primary beneficiaries per stirpes. And now imagine that, when you die, one of your children was no longer living. Because you added the “Per-stirpes” designation, that child’s share of the inheritance would be split evenly among their children (your grandchildren) without going through probate.

Can you Ensure that your Annuity will not go Through Probate?

The best way to ensure your annuity does not go through probate is to ensure there is a valid designated beneficiary named. It is important that specific individuals are named, and not simply your estate.

As noted above, it can be useful to name contingent beneficiaries as well.

Another consideration is the type of payout option you choose for your annuity. If you choose a payout option that doesn’t leave behind any assets, then you will certainly avoid the probate process because there will be no assets to pass on.

For example, if you chose a straight life payout option for your annuity, you would receive a steady stream of income payments until you died. After that, payments would stop, and if there was any money left in your annuity account, the insurance company would keep it. In that case, there would be no probate because there would be no assets to pass on to a beneficiary.

Tax Implications for Beneficiaries

Annuities can help you avoid probate, but beneficiaries may still have to pay taxes on their inheritance.

The amount of taxes that a beneficiary will owe depends on several factors, including the value of the death benefits. It also depends on the payout options they choose.

Check out our guide for beneficiaries on inherited annuities for more details.

Annuities Make it Easy to Leave a Legacy

There are several reasons to buy an annuity. First, they are a safe way to grow your retirement savings. They offer tax-deferred growth, which helps your money accumulate faster. And they are the only financial product that offers a guaranteed retirement income.

For all those reasons, annuities are powerful retirement tools.

In addition to all that, they are also a great way to leave a legacy for your loved ones. There are several options that allow you to pass on any remaining annuity payments to the beneficiaries you designate. And because you designate the beneficiaries up front, you can avoid the probate process altogether.

Both retirement and legacy planning are complex. If you’re not confident how best to prepare for retirement or reduce the administration of your estate, consider consulting a financial professional.

On the other hand, if you’re looking for a low-risk way to save for retirement that also offers an efficient way to pass on your assets after you die, consider buying an annuity.

You can buy a simple, low-risk fixed annuity from Canvas Annuity online.

Apply today.