Achieve Financial Brilliance with the 2025 CFC Exam – Crack the Code to Consulting Success!

In the scenario where an applicant dies before starting a nonqualified annuity, the typical recipient of the contract interest tax-free is the spouse. This is due to tax laws that favor spousal transfers, allowing the surviving spouse to inherit the annuity and gain tax advantages that may not be available to other beneficiaries.

When an annuity is inherited by a spouse, they often have the option to treat it as their own, effectively deferring any taxes until they begin making withdrawals from the account or until distributions are taken under different terms. This can be a significant financial advantage, allowing the funds to continue growing without immediate tax implications.

In contrast, other beneficiaries, such as children, parents, or siblings, generally do not enjoy the same tax benefits upon inheriting the annuity. While they may receive the funds, the interest accrued could be subject to income tax at the time of withdrawal, depending on the specific terms of the annuity and their tax situation. Thus, the spouse stands out as the most beneficial recipient with regard to tax treatment following the death of the applicant before the start of the annuity.