If an annuity is inherited by a spouse, the spouse keeps all options the owner had, but if it is inherited by some other individual or individuals, the options for distribution include a lump-sump payment, a payout of the total sum over five years and annuitizing over a lifetime if the decision is made within 60 days, explains Investopedia. For annuity payments already in effect at the time of death, the inheritor must take such payments at a minimum.
Tax regulations may affect the choice of the inheritor of how to distribute the annuity, informs Investopedia. Lump-sum mounts and fixed payments are treated as regular income and taxed according to the inheritor's tax bracket as defined by his total taxable income. If the annuity, however, was paid into with after-tax dollars, only the gains are treated as ordinary income in the payouts, not the principal. Choosing the fixed payments in this instance allows the tax liability to be spread out over time. A lump sum payment does not qualify for this tax benefit.
Because a spousal beneficiary is treated as the new owner of a tax-deferred annuity, the spouse can continue to defer taxes on the payments until death, says Investopedia. Owners should keep detailed records of the payments into annuities and make sure the proper beneficiaries are listed.