A nonqualified annuity can be placed in a trust. Nonqualified simply means the annuity isn’t part of the assets of a tax-deferred plan such as a 401(k). However, annuities have some tax advantages that can be forfeited when placed in a trust. It’s a good idea to consult with a financial adviser familiar with annuities and trusts to ensure you don’t lose any tax advantages when making an annuity a trust asset.
Annuities, Trusts and Taxes
When you purchase an annuity, the money you pay is invested. The annuity payments are a combination of the money you paid in and any investment gains. Those gains are normally tax-deferred until they are paid out to the annuity beneficiary. However, Internal Revenue Service rules say that annuity gains that go to a non-natural entity don’t qualify for the tax break and are immediately taxable. When an annuity is a trust asset, the trust, which is a non-natural entity, holds title to the annuity. Trust-owned annuities remain tax-deferred if the trust itself is owned by a real person, who is referred to a “beneficial owner.” A beneficial owner is someone who reaps the benefits of ownership of the annuity even though the trust technically owns it.