What happens to the proceeds of an annuity when a beneficiary is named?

When a beneficiary is named on an annuity, the proceeds will pass directly to that beneficiary upon the death of the annuitant, bypassing the probate process completely. This means the named beneficiary can receive the death benefit without the potential delays and costs associated with settling an estate through probate court.

Additionally, it is important to note that the taxation of the annuity depends on several factors, including whether the annuity was tax-deferred and how it was structured. Generally, while the proceeds may be subject to estate taxes based on the total value of the estate, they are not immediately taxed to the beneficiary in a way that would involve averaging the benefits over a 10-year period as indicated in the incorrect option.

By designating a beneficiary, the annuity holder ensures a smoother transfer of assets, allowing for quicker access to funds for the beneficiary, which is a major advantage of naming a beneficiary in this context.