Stretch Annuities: Definition, Benefits, and Considerations

A stretch annuity, also referred to as a legacy annuity, is a type of annuity option that allows tax-deferred allowances to be passed on to beneficiaries, offering them more flexibility and control over the inherited investment. Unlike joint-life annuities, which provide continued spousal benefits after the annuitant’s death, stretch annuities are typically non-qualified, meaning they are not held inside an IRA.

Legacy annuities, although not widely offered by insurers, can be advantageous for beneficiaries as they are not burdened with paying a large tax bill on gains received from the annuity. This can alleviate financial stress for families dealing with the loss of a loved one. The concept behind a stretch annuity is to extend the annuity contract over multiple generations rather than just a single owner or couple.

The distribution of an annuity after the death of the owner depends on the type of annuity plan selected. While some annuity payout plans cease payments upon the annuitant’s death, others may continue payments to a spouse or designated beneficiary for a specified period. With a stretch annuity, the beneficiary receives lifetime income based on the inherited contract value and their life expectancy, as determined by IRS rules.

It’s essential to differentiate between a stretch annuity and a joint-life annuity. A joint-life annuity guarantees payments for both the annuitant’s lifetime and that of their beneficiary. In contrast, a stretch annuity provides no payments to the person who took out the contract. Instead, payments are made to the owner’s beneficiary based on their life expectancy, stretching the tax liability over multiple years.

The tax benefit of a stretch annuity lies in the fact that the beneficiary’s tax liability is spread over several years, rather than receiving a lump sum distribution and facing immediate taxation. This makes stretch annuities a valuable tool in estate planning for wealthier families, as it minimizes tax implications for beneficiaries.

Stretch annuities are not widely offered by insurers compared to other types of annuities. However, some insurance companies may provide this option depending on their product offerings and market demand.

Yes, beneficiaries can typically be changed by the annuitant prior to their death. However, specific rules and procedures regarding beneficiary changes may vary depending on the terms of the annuity contract and applicable regulations.