Trust-Owned Annuities

Can a Trust Own an Annuity?

A trust can own an annuity, typically with the goal of helping the beneficiary financially. When this occurs, the trustee typically purchases the annuity and names the trust itself as the beneficiary.

The annuity can then be paid out to the beneficiary based on the annuitant’s lifespan. This means that a trust-owned annuity can essentially help set up the beneficiary with the payments from the annuity.

Key Facts About Trust-Owned Annuities

1. There is no legal barrier to an annuity being owned by or being placed into a trust.
2. Trust-owned annuities can make sense in some situations, depending on the type of trust and who the beneficiary is.
3. There are several circumstances where placing an annuity in a trust is not helpful, depending on the goal of the trust and the type of beneficiary.

There is no legal barrier that would stop a trust from being named as the owner of the annuity. However, a trust cannot be named as the annuitant in an annuity contract. 

The annuitant is the person who receives payments from the annuity. More importantly in this case, the insurance company uses the annuitant’s life expectancy to calculate the amount of each income payment the annuitant receives. 

For this reason, a trust cannot be an annuitant because the annuitant must be a living person. Typically, the trustee who purchases the annuity names themselves the annuitant if the annuity is to be owned by a trust.

One of the biggest benefits of using a trust for your estate planning is creating an orderly and controlled distribution of your assets to your heirs and beneficiaries. The legal and tax consequences of mixing investments and ownership structures can be confusing without speaking first to a qualified estate attorney.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

What Are the Tax Implications of Putting an Annuity in a Trust?

Putting an annuity into a trust can have tax advantages because annuities grow tax-deferred, which makes them an ideal savings vehicle that can be beneficial to a trust. 

Part of how annuities work is that they are generally tax-deferred, so you only have to pay taxes when the annuity’s savings are eventually withdrawn. Depending on the setup of the trust and the beneficiary, this could potentially have a strong financial benefit.

But, depending on the type of trust, there may be situations where tax deferral is not an option or where there is not necessarily a financial benefit from it.

If the trust is named as the annuity owner, rather than the beneficiary, then the annuity loses its tax-deferred benefit. An annuity’s growth is only tax-deferred if the owner is a natural person. So, if you designate the trust as the annuity’s owner, any growth the annuity earns is treated as taxable income.

Irrevocable trusts create further tax complications, as this type of trust is taxed at a different income tax rate that is usually higher than your personal income tax rate.

Whether placing an annuity within a trust makes sense or not will depend on your personal situation and who the beneficiary of the trust is. It is important to remember that the potential results of doing so can be complex. It is not the right option for everyone.

How To Transfer Ownership of an Annuity to a Trust

To transfer ownership of an existing annuity to a trust, you’ll need to contact the insurance company that issued the annuity. They’ll give you the necessary paperwork, and once you fill it out and turn it in, your provider will manage transferring the annuity into the trust. You and whoever the trustee is will have to have your signature notarized and witnessed to agree to the transfer.

To avoid estate tax complications, it’s recommended to transfer the annuity into an irrevocable trust in which you have no ownership interest. If you have any rights to make changes to or control the funds in the trust, the IRS will not consider the trust an estate tax shelter.

Additionally, the trust must be set up for the benefit of a living person, and that beneficiary must be able to access the funds in the trust, for it to be considered a valid estate tax shelter.

Once you’ve transferred ownership of the annuity to a trust, the annuity’s value and future appreciation is removed from your estate. Depending on exactly how the transfer occurs, it may be considered a taxable withdrawal, resulting in you having to pay taxes on the annuity when it’s transferred. 

Both annuities and trusts have complicated tax rules and provisions, so if you’re thinking about transferring your annuity to a trust, consider working with an experienced tax professional who can guide you through the process.

When To Avoid Using a Trust-Owned Annuity

There are situations where placing an annuity within a trust does not make sense. It is not a sound strategy if the goal of doing so is to avoid probate.

According to the Maine Bureau of Insurance, annuities already avoid probate on their own. So, there would be no benefit from placing one into a trust if that was your goal in doing so.

There are also differences in the effectiveness of placing an annuity in a trust depending on who the beneficiary of the trust is.

If the beneficiary is not a person but a business or organization, then some of the advantages of a trust-owned annuity may not take effect.

The same can hold true if there are multiple beneficiaries to the trust.