Annuities offer two key advantages that can come into play as you plan your estate: speed and privacy. Both of these derive from the fact that you can designate one or more beneficiaries for your annuity, rather than having your annuity made payable to your estate.
When you die, your annuity proceeds are quickly paid to your beneficiaries, usually without the delays and expenses associated with probate. Thus, if it is important to you to quickly pass money to your beneficiaries, an annuity can accomplish that for you.
Also, because the proceeds are passed to the beneficiaries, they bypass your will. If there are certain assets that you want to privately pass to certain beneficiaries rather than have them pass through the relatively public process of probating a will, an annuity can accomplish that for you, too.
So, you can see that naming beneficiaries is usually better than having an annuity payable to your estate and passing through your will.
There is an additional consideration if the annuity is an IRA. If it is payable to the estate, your heirs will be required to liquidate the annuity and pay the associated income taxes within five years of your death. If the annuity is instead payable to individual beneficiaries, those beneficiaries have the option to keep money in their inherited IRAs for many years, even up to their life expectancy, and thus delay the payment of taxes on the annuity.
If your beneficiaries are minor children, you may want to consider a trust to provide asset management until the children would be old enough to be financial responsible. Also, if one or more of your beneficiaries may lack the financial sophistication to preserve and manage a large windfall, many annuity carriers will allow your client to specify that one, some, or all of the beneficiaries must receive their share of the annuity proceeds in the form of a series of periodic payments over a specified period of time.
Last but not least, remember that annuities are subject to income taxes at death, and, if your assets are considerable, they may be subject to estate taxes as well. If you want to maximize what your beneficiaries will receive, consider using some of your annuity money to purchase life insurance. Life insurance can provide an immediate boost what the beneficiaries would receive, plus life insurance death benefits are paid free of income taxes. There are also ways, such as ownership by an Irrevocable Life Insurance Trust, to minimize or eliminate estate taxes on the life insurance death benefit.