Last updated: March 2026 | Reviewed by: AnnuityJournal Editorial Team
Most retirees spend more time planning a two-week vacation than planning what happens to 30 years of accumulated wealth when they die. The average American spends 20 years in retirement. The decisions made at the beginning of that period, about beneficiary designations, account structures, and income product choices, determine whether assets transfer efficiently or get eaten by taxes, probate, and family confusion. Here is what actually matters.
Estate Planning Is Not Just About Wills
A will is one piece of the estate planning puzzle, and not always the most important one. For most retirees, the majority of wealth sits in accounts that transfer outside of a will entirely, including 401(k) plans, IRAs, annuities, and life insurance. These assets transfer by beneficiary designation, and a beneficiary designation overrides anything written in a will.
That means an outdated beneficiary designation on a $400,000 IRA can send that money to an ex-spouse, a deceased parent, or no one at all, regardless of what the will says. Reviewing and updating beneficiary designations is the single highest-leverage estate planning action most retirees can take, and it costs nothing.
The Estate Planning Checklist for Retirees
Step 1: Review All Beneficiary Designations
Check beneficiary designations on every account that has one:
- 401(k), 403(b), and other employer retirement plans
- Traditional and Roth IRAs
- Annuities (primary and contingent beneficiary)
- Life insurance policies
- Bank accounts with payable-on-death (POD) designations
Name both a primary beneficiary and a contingent beneficiary. If the primary beneficiary predeceases you and there is no contingent, the account may default to your estate and go through probate.
Step 2: Understand How Your Annuity Passes to Heirs
Annuities with named beneficiaries pass outside probate. The beneficiary receives the death benefit directly from the insurance company, typically within 30-60 days of claim, without court involvement. This is one of the more underappreciated benefits of annuities from an estate planning perspective.
What beneficiaries receive depends on the annuity type and options elected:
- MYGA or FIA: Beneficiaries typically receive the full account value, including accumulated earnings
- SPIA with period-certain option: Remaining guaranteed payments continue to the beneficiary
- Life-only SPIA: Payments stop at death, nothing passes to heirs
- Income annuity with return-of-premium rider: Beneficiary receives the remaining premium if you die before recovering your initial investment
See our complete guide to annuity death benefits for how each product type handles the death claim.
Step 3: Know the Inherited Annuity Tax Rules
Beneficiaries who inherit annuities owe ordinary income tax on the accumulated earnings — and this is where planning matters. Unlike inherited stocks or real estate, annuities do not receive a step-up in cost basis. Every dollar of growth is taxable to the beneficiary at their marginal rate when they take distributions.
Options beneficiaries typically have:
- Lump sum: Take the full value immediately (full tax hit in one year)
- Five-year rule: Spread distributions over 5 years (smooths tax impact)
- Stretch option (for eligible beneficiaries): Take distributions over life expectancy — available for spouse beneficiaries
For large inherited annuities, the tax planning conversation should happen before the owner dies, not after. A spouse beneficiary has the most flexibility, including the ability to continue the contract as owner. See our annuity taxation guide for the complete rules on inherited annuity treatment.
Step 4: Plan Your Required Minimum Distributions
If your annuity is held inside a traditional IRA or 401(k), it is subject to Required Minimum Distributions (RMDs) beginning at age 73 under current law. Ignoring RMDs creates a 25% excise tax on the amount you should have withdrawn. The IRS RMD rules require distributions from traditional IRAs beginning at 73, based on account value and IRS life expectancy tables.
Annuities inside Roth IRAs are not subject to RMDs during the owner’s lifetime, which is one reason Roth conversions and Roth IRA-funded annuities are a powerful estate planning tool. Tax-free growth, no mandatory distributions, and a tax-free inheritance for beneficiaries who inherit a Roth. See our annuities in a Roth IRA guide for how this works in practice.
Step 5: Consider a Roth Conversion Strategy
Converting traditional IRA assets to a Roth before death can eliminate the inherited IRA tax burden for your beneficiaries. The tradeoff is paying taxes now rather than leaving that obligation to your heirs. Whether it makes sense depends on your current tax bracket, your expected future brackets, and your beneficiaries’ tax situations.
The optimal window for Roth conversions is often between retirement and age 73, when earned income is lower but RMDs have not yet begun. This is the period when marginal rates are frequently at their lowest, and conversions can be executed at the lowest possible tax cost. The IRS Roth IRA rules govern conversion eligibility and tax treatment.
Step 6: Address the Spouse Survivorship Gap
When one spouse dies, the survivor typically loses one Social Security check, moving from two benefits to one. If the couple had a joint-income annuity without survivorship benefits, the surviving spouse may face a sudden income drop at exactly the worst moment. Structuring income annuities with joint and survivor payout options, or with period-certain guarantees, protects the surviving spouse’s income floor.
The SSA.gov survivors benefit page explains how Social Security survivor benefits work and what the surviving spouse can expect to receive after the higher-earning spouse dies. Planning for this income change before it happens is far better than discovering it at the time of loss.
Step 7: Document Everything in One Place
Family members who inherit your accounts need to know where those accounts are. A letter of instruction — not a legal document, just a practical guide — telling your executor where to find account information, contact numbers for insurance carriers and financial institutions, and the location of key documents can save months of frustration and thousands in unnecessary fees and delays.
Common Estate Planning Mistakes Retirees Make
- Naming an estate as beneficiary on retirement accounts (forces probate, loses stretch options)
- Forgetting to update beneficiaries after divorce, death of a beneficiary, or new grandchildren
- Holding a life-only SPIA without understanding that no death benefit passes to heirs
- Ignoring the five-year and stretch distribution options when inheriting an annuity, resulting in an unnecessary large tax bill
- Assuming a will handles everything without reviewing how non-probate assets transfer
Frequently Asked Questions
Do annuities go through probate when you die?
No, not if you have named a living beneficiary. Annuities with named beneficiaries pass directly to those beneficiaries outside the probate process. The beneficiary files a death claim with the insurance company and receives the funds independently of the estate. This makes annuities one of the more efficient asset-transfer vehicles for estate planning purposes.
Are annuities included in your estate for tax purposes?
The value of an annuity is included in your taxable estate for federal estate tax purposes, even though it passes outside of probate. For most Americans, the federal estate tax exemption (currently over $13 million per person as of 2026) means this is not a practical concern. For large estates, coordinate with an estate planning attorney. Check the IRS estate tax page for current thresholds.
What happens to an annuity when the owner dies?
What happens depends on the type of annuity and the payout option elected. A MYGA or FIA typically pays the full account value to the named beneficiary. An income annuity depends on the payout structure: life-only pays nothing after death, while period-certain, joint-life, and return-of-premium options continue or pay a death benefit. See our annuity death benefit guide for the full breakdown by product type.
How are inherited annuities taxed?
Beneficiaries owe ordinary income tax on the accumulated gains inside an inherited annuity. Unlike stocks or real estate, there is no step-up in cost basis. The original owner’s cost basis carries over, and all earnings above that basis are taxable to the beneficiary. Distribution options (lump sum, five-year spread, or stretch for spouse beneficiaries) affect how the tax is spread across years. A tax advisor can help model which option produces the lowest total tax burden for the beneficiary’s specific situation.
