He Bought a $300,000 Annuity at 70 With a 10-Year Guarantee ‘for the Kids.’ The Kids Got the Checks, and Every One Was Taxed as Their Income
A 10-year guaranteed annuity sounds like a clean gift to leave the kids, but the checks that land in their mailboxes carry a tax surprise most families never see coming until they file that first return.
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When an income annuity with a guaranteed payout period passes to heirs after the owner dies, the remaining checks become taxable income to the beneficiaries. In this kind of scenario, a $300,000 annuity purchased at 70 with a 10-year period certain delivers checks to the children if the owner dies early. How much of each check gets taxed depends on where the premium came from and the children’s existing income.
Annuity Sales Hit a Record as Peak 65 Arrived
Today, more retirees are converting savings into guaranteed income. U.S. annuity sales reached $464.1 billion in 2025, up 7% from the prior year, according to LIMRA’s U.S. Individual Annuity Sales Survey. Single premium immediate annuities, which turn a lump sum into scheduled payments, are most often paired with a period-certain guarantee. Their sales rose 6% to $14.4 billion.
LIMRA attributes much of the demand to demographics. In March 2026, Bryan Hodgens, then head of LIMRA research, noted that 4.1 million Americans are turning 65 each year and many lack pensions or other income for basic expenses. LIMRA forecast strong annuity sales in 2026 despite expected economic weakness.
How a Period-Certain Guarantee Moves Income to Heirs
A lifetime income annuity normally stops at the owner’s death. A period-certain feature guarantees payments for a set number of years. If the owner dies before the period ends, named beneficiaries will collect the remaining payments. A buyer at 70 with a decade-long guarantee leaves checks to children only if death occurs before 80, and only for years remaining on the schedule. Payments end at death if the guarantee period has passed.
Qualified Money Makes Every Dollar Taxable
For qualified annuities bought with IRA or retirement plan money, 100% of each payment is taxed as ordinary income because the original owner contributed pre-tax dollars, according to Revolutionary Wealth analysis. The children inherit both the checks and the taxes owed.
Nonqualified annuities are bought with already-taxed savings, and they work differently. An exclusion ratio splits each payment into a return of principal and earnings, and only the earnings portion is taxed. Personal finance expert Suze Orman has described the rule for heirs this way: beneficiaries “will have to pay ordinary income tax on any money that they have inherited above what you originally put in.”
Under either structure, inherited annuities miss the step-up in basis available for inherited stocks and real estate. Growth inside the contract is taxed at ordinary income rates instead of capital gains rates.
Inherited Checks Often Arrive in Peak Earning Years
Timing matters as well, as a parent buying an annuity late in retirement typically has middle-aged children earning peak income. Annuity payments stack on top of wages and are taxed at each child’s marginal rate, which may be higher than what the retired parent would have paid.
For 2026, the IRS applies a 22% rate to single taxpayers with taxable income over $50,400 and a 24% rate above $105,700.
Another consideration: $10,000 of a fully taxable inherited annuity income is taxed at 24%, producing $2,400 in federal tax versus $1,200 at 12%. The difference depends on whose tax return the income lands on, plus state taxes. It is one of a handful of IRS provisions quietly draining inherited retirement money, and we mapped out the rest in a free report on retirement tax traps.
Payout Choices That Shape the Final Tax Bill
Some contracts allow beneficiaries to take remaining guaranteed value as a lump sum or continue scheduled payments. A lump sum puts income into one tax year and may push heirs into higher brackets. Spreading payments across years can reduce the overall tax burden. Contract terms may limit your options.
Beneficiary designations matter as well. The period-certain guarantee pays the same dollars no matter who is named. Splitting those payments among several heirs, or naming heirs in lower brackets, changes how much of each dollar is left after taxes.
As annuity sales reach records, more families will inherit these contracts. The guarantee delivers fixed checks. The tax cost depends on the original funding source and the beneficiaries’ income, both determined long before the first inherited payment arrives.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
