When you set up an annuity, you typically designate a person to serve as the beneficiary of the account. In the event of your death, the beneficiary will receive the remaining value of the account. The type and amount of funds will vary according to the type of annuity. To avoid probate, the beneficiary must be alive at the time of your death. If your beneficiary dies before you, you must name another beneficiary in order for the annuity to avoid probate.
Death During Accumulation Period
Annuities typically have an accumulation period during which you add funds to the annuity. For example, during your working years you might direct a certain amount each month to your annuity. If you die during the accumulation period, the annuity guarantees to pay a certain sum directly to the designated beneficiary, bypassing probate.
Death During Payout Period
Annuities have a period where the investor receives a lump sum or scheduled payments from the insurance company -- often you might choose payments to begin once you retire. If you die during the payout period, the insurance company will pay the your designated beneficiary. Depending on the terms of your annuity, the beneficiary may receive a limited number of payments or payments for his lifetime, but either way, this asset bypasses probate.
Method to Designate the Beneficiary
The specific method of naming a beneficiary depends on the forms provided by the company selling the annuity. It's typically as simple as writing the name of your beneficiary on the forms in a designated place. If there is any problem with the paperwork, and you have managed not to name a beneficiary -- a very unlikely occurrence -- the annuity will go to probate.