---
title: "How an Inherited Annuity Is Taxed: Memorial Merits Founder Gabriel Killian on What a Lump Sum Costs"
description: "Memorial Merits founder Gabriel Killian on inherited annuity tax: what a lump sum costs, the one-year deadline and his free calculator."
author: Darie Nani (Editor-in-Chief)
date: 2026-10-09T18:55:15.780Z
updated: 2026-10-09T18:55:15.806Z
canonical: https://www.sovereignmagazine.com/article/how-is-an-inherited-annuity-taxed
image: https://cdn.nanimediahouse.com/gabriel-killian-hero.webp
categories: Finance
content_type: Spotlight
region: Virginia
publication: Sovereign Magazine
schema_type: Article
about:
  - type: Organization
    name: Memorial Merits
    description: Memorial Merits is a free platform that helps families understand the costs, rules and paperwork of end-of-life planning and the months after a death, in plain language. Based in Virginia Beach, Virginia, it publishes funeral and cremation cost guides, funeral home directories for all 50 states and Washington, D.C., probate and executor guides, and free tools including the Inherited Annuity Tax Calculator and the Funeral Cost Calculator.
    url: https://memorialmerits.com/
    industry: End-of-life planning
---

The tax on an inherited annuity is largely settled by the payout option the beneficiary chooses on the insurance company's claim form. Gabriel Killian, founder of Memorial Merits, a free end-of-life planning platform based in Virginia Beach, Virginia, expanded the company's Inherited Annuity Tax Calculator on October 4 so that beneficiaries can see the federal tax on each option before they sign. Two days later the company launched a national funeral cost calculator.

"The biggest mistake is choosing the payout before seeing the tax," Killian says. "The insurance company sends a claim form, and the beneficiary picks lump sum, 5 years, 10 years or lifetime payments, often in the same weeks as the funeral and the estate paperwork." Once that form is signed, he says, the tax outcome is mostly locked in.

## How an Inherited Annuity Is Taxed

The first question is what kind of money went into the contract. A qualified annuity, bought with pre-tax money and usually held inside an IRA or a workplace retirement plan, is taxable in full as ordinary income when it is paid out. A non-qualified annuity, bought with savings that had already been taxed, is taxed only on its earnings, and the money the owner paid in comes back to the beneficiary tax-free.

Inherited annuities also miss out on the step-up in basis that applies to most inherited assets. When someone inherits stock or a house, its value for tax purposes is reset to its value on the date of death, so gains made during the owner's lifetime are never taxed. Section 1014(c) of the Internal Revenue Code withholds that step-up from income the owner had earned but not yet received, which includes the earnings in an annuity, so those earnings are taxed as ordinary income to whoever inherits the contract. It is one of three things Killian says catch beneficiaries off guard, along with the tax on a lump sum and the one-year deadline for lifetime payments. The 10% penalty on early withdrawals does not apply, because the money is paid out after the owner's death.

For a non-qualified annuity inherited before payments began, a beneficiary other than a spouse has two main alternatives to a lump sum. The whole contract can be paid out within five years of the owner's death, or it can be paid out over the beneficiary's own life expectancy, as long as payments start within one year of the death. A surviving spouse can instead keep the contract going as its new owner. Qualified annuities held in an IRA or workplace plan follow the SECURE Act's 10-year rule when the owner passed away after 2019. Most beneficiaries must then empty the account within 10 years, with exceptions for a spouse, a minor child, a disabled or chronically ill person, and anyone no more than 10 years younger than the owner.

## What a Lump Sum Costs on a $100,000 Inherited Annuity

"On a $100,000 non-qualified annuity, our calculator shows about $8,650 in 2026 federal tax as a lump sum, against about $4,800 taken as lifetime payments," Killian says. The worked example on the calculator's page assumes the owner paid $60,000 into the contract, leaving $40,000 of taxable earnings, and that the beneficiary is a 50-year-old single filer with $65,000 of other income.

Taken in one year, the whole $40,000 is added to that income and much of it is taxed at a higher bracket. Spread over the beneficiary's life expectancy, each year's payment is small enough to stay in a lower bracket, and the beneficiary keeps about $3,850 more. Taking the money out over five years costs about $8,500 in the same example.

The calculator is free, and Memorial Merits does not sell annuities. When a beneficiary wants professional help, the calculator points them to a partner that fits their situation, drawn from the vetted partner companies that support Memorial Merits. "The difference is the order," Killian says. "An annuity seller's calculator exists to start a sale. Ours shows the beneficiary the tax on every payout choice first, with each rule linked to the IRS or the tax code, and the beneficiary decides what to do next. If they never click anything, the calculator still did its job."

The calculator works in two steps. The beneficiary first enters the type of annuity, its current value, the amount the owner paid in, their own yearly income and their filing status, and sees the taxable and tax-free amounts and the federal tax on a lump sum. The second step asks whether the beneficiary is a spouse, a child or other relative, an estate or a trust, along with the month and year of the death and the beneficiary's age. It then compares the total federal tax, the first-year tax and the amount kept under each payout option, and marks the option with the lowest tax. The estimate takes about a minute and needs no account, email address or phone number, and the page advises having a licensed professional confirm the exact figure.

## The One-Year Deadline to Start Lifetime Payments

"The deadline that costs the most when it's missed is the one-year deadline to start lifetime payments on an inherited non-qualified annuity," Killian says. "Miss it, and what's left is generally taking the money out within five years." In the calculator's $100,000 example, that is the difference between about $4,800 and about $8,500 in federal tax.

The deadline falls in the same first year as the funeral, the death certificates, the will and the probate filings. The payout choice usually belongs to the named beneficiary rather than the executor, Killian says, and "if the beneficiary is waiting on the executor to tell them what to do, the year can run out with no one making the call." The calculator works out the deadline from the date of death and shows the date and the number of days left.

## Funeral Costs in the First Year After a Death

On October 6, Memorial Merits launched a [funeral cost calculator](https://memorialmerits.com/funeral-cost-calculator/) for all 50 states and Washington, D.C., which works the same way as its inherited annuity tax calculator and gives a free estimate with a source for every figure.

It asks up to seven questions, including the state, burial or cremation, the type of service, where the body or ashes will go, the number of guests and whether the person who passed away served in the military, in which case it adds VA burial benefits. The result is a typical cost range with itemized charges for the plot, the opening and closing of the grave, the vault and the headstone, along with a checklist of next steps. A family that already has a quote can enter the funeral home's total to see how it compares with the typical range.

The prices were checked in September 2026 against funeral home price lists, National Funeral Directors Association figures adjusted for inflation and cemetery price lists, and are reviewed every three months. On those figures, a traditional burial costs from about $15,250 in New Mexico to about $17,200 in Connecticut, Massachusetts and Rhode Island, and two Ohio funeral homes priced the same funeral $7,355 apart.

## A Navy Instructor's Approach to End-of-Life Costs

Killian served in the US Navy, part of that time as a certified instructor on missile defense systems. "The job was taking something complex and teaching it so someone could act on it correctly, without guessing," he says. "The Navy also teaches you that the person in front of you has to be able to trust the information completely, because they are about to act on it. A family deciding how to pay for a funeral or which payout to take deserves that same standard."

Memorial Merits explains each subject in steps and plain words, with every rule tied to its source. "If I can't point to where a number comes from, it doesn't go on the page," Killian says. Besides the two calculators, the company publishes funeral and cremation cost guides, funeral home directories for all 50 states and Washington, D.C., and probate and executor guides, and says it works with more than 45 vetted partner companies in funeral, cremation, estate planning and legal services.

Killian is also the author of the Should Tomorrow Never Come legacy journals, in which a person records their life story, final wishes and the medical and financial details their family will need.

**About Gabriel Killian**
Founder, Memorial Merits

Gabriel Killian is the founder of Memorial Merits, a free end-of-life planning platform based in Virginia Beach, Virginia. A US Navy veteran, he served part of his time as a certified instructor on missile defense systems, and he is the author of the Should Tomorrow Never Come legacy journals.

**About Memorial Merits**

Memorial Merits is a free platform that helps families understand the costs, rules and paperwork of end-of-life planning and the months after a death, in plain language. Based in Virginia Beach, Virginia, it publishes funeral and cremation cost guides, funeral home directories for all 50 states and Washington, D.C., probate and executor guides, and free tools including the Inherited Annuity Tax Calculator and the Funeral Cost Calculator.

[Website](https://memorialmerits.com/)

## FAQ

**Q: How much tax do I pay on an inherited annuity?**
It depends on the type of annuity and how the money is taken. A qualified annuity is taxable in full as ordinary income, while a non-qualified annuity is taxed only on its earnings. In the Memorial Merits example of a $100,000 non-qualified annuity with $40,000 of earnings, the 2026 federal tax comes to about $8,650 as a lump sum and about $4,800 as lifetime payments, for a single beneficiary with $65,000 of other income.

**Q: Do beneficiaries pay taxes on annuity distributions?**
Yes, on the taxable part. The earnings in a non-qualified annuity and the whole of a qualified annuity are taxed as ordinary income in the year they are paid out, because inherited annuities do not receive a step-up in basis. The 10% early withdrawal penalty does not apply to payments made after the owner's death.

**Q: What is the best thing to do with an inherited annuity?**
Killian's advice is to see the federal tax on every payout option before signing the insurer's claim form. A surviving spouse can usually continue the contract as its owner. Other beneficiaries of a non-qualified annuity who want to spread payments over their lifetime must start them within one year of the death, or the money generally has to come out within five years. A licensed tax professional should confirm the exact figure.

**Q: How much tax will I pay on an annuity?**
Payments from a qualified annuity are taxed in full as ordinary income. With a non-qualified annuity, part of each annuity payment is treated as a tax-free return of the money paid in and the rest as taxable earnings. The same split applies to an inherited annuity, which also has fixed deadlines for paying out the money.