Multiple beneficiaries can also impact stretches, he said. If they allow it, some insurers require multiple stretch beneficiaries to make withdrawals based only on the oldest heir's life expectancy. And other issuers won't allow a spouse to continue an annuity unless the spouse gets the entire balance.
For larger estates, keep in mind that annuities are income-in-respect to decedent assets, which means an heir could get a big tax deduction based on the pre-tax income inside of an annuity, assuming the estate paid federal estate taxes, Kitces said.
But because they are IRD assets, annuities do not get a step-up in basis (except contracts issued before Oct. 21, 1979, which were grandfathered).
Holding annuities in trusts is generally fine, Kitces said, but other non-natural person owners, like a family limited partnership, will cause an annuity to lose its tax deferral.
Naming trusts as a beneficiaries doesn't work well, he added. IRAs can use see-through trusts to preserve a stretch IRA, but the relevant IRS rulings in this area do not apply to annuities, so insurers tend to follow the five-year rule for trusts that inherit IRAs, Kitces said.
Under a private letter ruling it's possible to do a 1035 exchange after death. For years, the IRS did not allow this, Kitces said, “and in practice this was a very harsh thing” because older owners often had non-competitive fixed contracts that younger heirs wanted to exchange for growth products.
Annuity companies are “quite variable” as to whether they will allow exchanges, Kitces said, adding that it seems to be based on whether they anticipate being net losers or winners with exchanges.