If an annuity is to continue after the owner's death, other taxes may apply to the named beneficiary or heirs (that is, the owner's estate or individuals who inherit from the estate, if the owner had not designated a beneficiary).

Income Tax

Annuity payments collected by beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by the owner. However, there's no 10 percent penalty on withdrawal under age 59 1/2 regardless of the recipient's age, or the owner's age at death.

Estate Tax

The present value at the owner's death of the remaining annuity payments is an asset of his or her estate, and subject to estate tax with other estate assets. Thus, beneficiaries other than a surviving spouse could pay substantial federal income taxes on death proceeds received from the contract. Annuities passing to a surviving spouse or to charity escape this tax.

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