Which Annuities Avoid Probate & How They Work

Annuities are financial contracts designed to provide future income, often for retirement. Probate is a formal legal process that validates a deceased person’s will and oversees the distribution of their assets. Properly structured annuities can bypass this process, allowing for a more direct transfer of funds to designated recipients.

Understanding Probate and Annuities

Probate is a court-supervised procedure that confirms the authenticity of a will, settles outstanding debts, and distributes a deceased individual’s assets. This process can be lengthy, potentially tying up assets for several months or even years. Assets that pass through probate are typically those solely owned by the deceased without a designated beneficiary or other non-probate transfer mechanisms.

An annuity, in contrast, is a contract between an individual and an insurance company. It involves payments made to the insurer in exchange for a stream of income. The parties involved usually include an owner, who purchases the annuity, and an annuitant, who is the person whose life the payments are based upon.

The Key Role of Beneficiary Designations

Annuities, similar to life insurance policies or retirement accounts like 401(k)s and IRAs, are considered “contractual assets.” This classification means their distribution upon the owner’s death is governed by the terms of the contract, rather than a will. When an annuity owner names one or more beneficiaries directly on the annuity contract, the funds bypass the probate process entirely.

Upon the owner’s death, the annuity company pays the designated beneficiaries directly. It is important to name both a primary beneficiary, who is first in line to receive the funds, and a contingent (secondary) beneficiary, who would receive the funds if the primary beneficiary is unable or unwilling to.

Applying Beneficiary Rules to Annuities

The ability of an annuity to avoid probate hinges on the presence and proper designation of beneficiaries, not on the specific type or investment structure of the annuity itself. For instance, with fixed annuities, if a beneficiary is named, payments or the remaining value are transferred directly to them.

Similarly, for variable annuities, the named beneficiary receives the account value directly. In the case of immediate annuities, if a guaranteed payment period exists and the annuitant dies before its completion, the remaining guaranteed payments are directed to the beneficiary. For deferred annuities, the accumulated value or any specified death benefit passes to the beneficiary.

When Annuities Go Through Probate

Annuities can become subject to probate under specific circumstances. If the annuity owner fails to designate any beneficiary on the contract, the annuity’s value typically becomes part of the deceased’s general estate. This means it will then be distributed according to the terms of a will or, if no will exists, by the state’s intestacy laws.

Another situation where an annuity enters probate is if the owner explicitly names their “estate” as the beneficiary. In this case, the funds are intentionally directed into the probate process. Furthermore, if both the primary and contingent beneficiaries predecease the annuity owner, and no new beneficiaries are named, the annuity’s value will likely revert to the estate and undergo probate. In these scenarios, the annuity’s value is administered by the court, potentially incurring associated fees and delays.

Ensuring Your Annuity Avoids Probate

To ensure an annuity bypasses probate, it is important to regularly review and update beneficiary designations. This is especially relevant after major life events such as marriage, divorce, the birth of children, or the death of a named beneficiary. Maintaining current beneficiary information helps align the annuity with your present wishes.

Designating contingent beneficiaries is also important to prevent the annuity from falling into probate if the primary beneficiary cannot receive the funds. It is generally advisable to avoid naming your “estate” as a beneficiary if the goal is to bypass probate. While an annuity can also be owned by or payable to a trust to avoid probate, naming beneficiaries directly on the contract is often the simplest method for achieving this outcome.