How to Leave Annuities to Minors

Your child cannot inherit an annuity directly until she turns 18.

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Annuities are contracts in which you trade money, or premium, to an insurance company in exchange for the promise of a stream of income. The stream of income can begin now (immediate annuities), or at some point in the future (deferred annuities). The rules for passing on annuities to future generations depend largely on whether the annuity has already begun generating income.

Minors and Inheritances

Minors cannot inherit money directly. If you want the money to benefit a child while the beneficiary is still a child, then you must set up a trust and appoint a trustee. The simplest way is via the Uniform Transfer to Minors Act, which can be done free — you just appoint a trusted, responsible adult to handle the money on the child's behalf.

Other Trust Options

It is possible to put some additional strings on the money, in order to encourage your child to engage in responsible behaviors. An attorney can assist you in setting up a trust that grants money to the child contingent upon graduating from school, remaining drug free or any number other milestones. There is a cost, however, to setting up these kinds of trusts.

Joint Life Annuities

For immediate annuities and annuities that have already begun disbursing income (that is, annuities that have been "annuitized"), the simplest thing to do, and perhaps the most tax-efficient, is to leave a joint life annuity to the child. That means that annuity payments will continue not only for the rest of your life, but for the child's life as well. This spreads the income over the longest period of time, maximizes the benefits of tax deferral, and puts the most amount of income possible into the lower tax brackets. Your monthly or annual payouts will be lower under a joint-life annuity, though, than they would be under a life-only annuity on yourself. However, this is a popular way to leave an annual birthday present or Christmas gift for children, long after a parent or grandparent is gone. Note that you can't leave a life annuity to a trust, since a trust is not a natural person and has no life span useful for calculating a life annuity.

Designated Beneficiaries

Annuities, retirement accounts and life insurance policies bypass probate courts and go directly to the named beneficiary — if there is one. Otherwise, the annuity becomes part of your estate and subject to probate, probate costs and delays. Be sure to name a designated beneficiary and contingent beneficiary on your annuity paperwork to avoid probate.