How Many Beneficiaries Can You Have on an Annuity?

Annuities are financial contracts designed to provide a steady income stream, often during retirement. They also serve as a tool for leaving a financial legacy. Designating beneficiaries ensures remaining annuity assets are distributed according to the owner’s wishes, avoiding complications and delays.

Understanding Beneficiary Designation

There is no strict numerical limit to the number of beneficiaries an individual can designate on an annuity. Owners can name multiple beneficiaries, whether individuals or organizations, and specify how the death benefit will be divided. Designating multiple beneficiaries allows for a detailed distribution plan, requiring careful consideration to ensure clarity and avoid future disputes.

Annuity owners distinguish between primary and contingent beneficiaries. Primary beneficiaries are first in line to receive annuity proceeds upon the owner’s death. If a primary beneficiary predeceases the annuity owner or cannot claim benefits, contingent (secondary) beneficiaries become eligible to receive funds.

When designating multiple beneficiaries, owners can specify how proceeds are distributed if a primary beneficiary is no longer living. Two common methods are “per stirpes” and “per capita.” A “per stirpes” designation, meaning “by branch,” ensures that if a named beneficiary dies before the annuity owner, their share passes to their direct descendants, such as their children. This method keeps the inheritance within the deceased beneficiary’s family line. In contrast, a “per capita” designation, meaning “by head,” distributes the deceased beneficiary’s share equally among the remaining living beneficiaries in that generation, potentially excluding the descendants of the deceased beneficiary.

Information Required for Designation

Designating beneficiaries requires providing specific and complete information to the annuity provider. For each individual, this includes their full legal name, relationship to the annuitant, date of birth, and Social Security Number (SSN) or Taxpayer Identification Number (TIN). An accurate current address and contact information are also important to facilitate the claims process and avoid delays.

When multiple beneficiaries are named, the annuity owner must clearly specify the percentage or share of the annuity proceeds each will receive. For instance, if designating three primary beneficiaries, the owner could assign 33.33% to each, or different percentages as desired, ensuring the total equals 100% for that beneficiary class. This precise allocation helps prevent ambiguity during distribution. Annuity providers offer specific beneficiary designation forms for these details.

The Designation Process

The designation process involves completing and submitting required forms to the annuity provider. Many providers offer various submission methods, including mail or online portals. After submission, confirm the designation has been received and accurately recorded by the annuity company.

Beneficiary designations are not permanent and can be changed by the annuity owner at any time, unless an irrevocable beneficiary was named. Regularly review and update designations, especially after significant life events such as marriage, divorce, the birth of children, or the death of a named beneficiary. Updating involves completing a “change of beneficiary” form from the annuity provider. This ensures the annuity aligns with the owner’s current wishes and avoids probate issues.

Distribution to Multiple Beneficiaries

When an annuity owner passes away, the proceeds are distributed to designated beneficiaries according to instructions on file. Proceeds can be paid out in several ways, including a lump-sum payment, annuitized payments over a period, or inherited annuity options. The specific percentages or per stirpes/per capita instructions guide how the actual payout is divided among the recipients.

Tax implications for beneficiaries receiving annuity proceeds depend on whether the annuity was qualified (funded with pre-tax dollars, like a 401(k) or IRA) or non-qualified (funded with after-tax dollars). For qualified annuities, the entire distribution, including contributions and earnings, is generally taxed as ordinary income. For non-qualified annuities, only the earnings are taxed as ordinary income, as the principal was already taxed. Beneficiaries do not typically face a 10% early withdrawal penalty if under age 59½, because the distribution is due to the owner’s death.

A surviving spouse often has unique options, such as “spousal continuation,” which allows them to take over the annuity contract as the new owner and continue its tax-deferred status. This can provide financial stability and defer tax obligations. Non-spouse beneficiaries have options like taking a lump sum, which is fully taxable in the year received, or spreading payments over a period, such as five years or their life expectancy, to manage the tax burden. The “five-year rule” requires the entire balance to be distributed within five years of the owner’s death. A “stretch provision” allows distributions over the beneficiary’s lifetime, spreading out the tax liability.