Key Takeaways
- There is no legal barrier to an annuity being owned by or being placed into a trust.
- Trust-owned annuities can make sense in some situations, depending on the type of trust and who the beneficiary is.
- 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.
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 as the annuitant 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.
There is no legal barrier that would stop a trust from being named as the owner of the annuity. It is important to remember that the process can vary depending on the type of trust and style of the annuity.
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®Founder of Clocktower Financial ConsultingStephen Kates is a Certified Financial Planner™ and personal finance expert specializing in financial planning and education. Stephen has expertise in wealth management, personal finance, investing and retirement planning.
What Are the Benefits of Putting an Annuity in a Trust?
Placing an annuity inside a trust can help to marry the benefits that come from each, and there are potential tax advantages that can make it an appealing option.
Part of how annuities work is that they are generally tax-deferred, which makes them an ideal savings vehicle that can be beneficial to a trust. Placing an annuity within a trust can help to provide eventual income to the beneficiary.
Depending on the setup, the money that is placed into the annuity goes into the trust. The trust is essentially the beneficiary of the annuity, meaning that money can then eventually be bestowed to the beneficiary of the trust.
An annuity basically provides another tax-deferred method for a beneficiary to benefit from a trust.
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Tax Implications of Trust-Owned Annuities
One of the main benefits of annuities attractive to many individuals, owned by a trust or not, is the fact that they are tax-deferred.
This means that, typically, you can place money into the annuity without having to worry about taxes. 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.
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.
Example of a Trust-Owned Annuity
Depending on the type of annuity and trust, what a trust-owned annuity looks like and how it operates can vary.
Generally, it involves the trustee purchasing an annuity with the trust being named the owner of that annuity.
The annuity can then gain value while within the trust, as it would if it was owned by a person. Annuities can be paid into over time to grow their value and can also be invested or tied to the performance of an index to accelerate that growth.
When the annuitant dies, the benefit of the annuity is then paid to the trust, meaning it can eventually pass to the beneficiary.
How To Transfer Ownership of an Annuity to a Trust
It is not difficult for an annuity to own a trust. Typically, when the annuity is first purchased, the trust can be named as the owner.
This means that the trust will serve as the beneficiary and can receive the benefit from the annuity when the annuitant dies.
It may be more difficult to transfer an existing annuity into trust ownership. Annuity contracts can be difficult to break and are sometimes permanent.
If you have already purchased or have an active annuity and did not name the trust as the owner, it may be hard to transfer that ownership to the trust.
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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.
