Annuity Tax Rules Have Never Been Better. Nonqualified deferred annuities (NQDAs) are an important financial tool for many clients.  That being said, they do not offer the same tax-free death benefits as life insurance. Nor do they offer the tax-advantaged access to cash values as does life insurance, NQDAs grow tax deferred

From a federal income tax perspective, annuities seem straightforward. However, they have their share of tax ambiguity.  In a recent Internal Revenue Service (IRS) Private Letter Ruling, the IRS addressed some of these issues. In this Private Letter Ruling (PLR), the IRS was asked a number of questions about trust-owned annuities.

  • Do NQDAs owned by trusts still get tax-deferred cash buildup?
  • Can a trust created by an older person own an annuity contract on a younger person’s life?
  • How can the 10 percent pre-59 ½ extra tax on taxable distributions be avoided?
  • By when must the distributions from an annuity contract begin?
  • What kind of trust languageis most favorable to annuity ownership?

In this PLR, the IRS answered most of these questions in the affirmative.  Consequently, it’s likely that trust-owned NQDAs will become even more popular.

All kinds of trusts may be candidates to own NQDAs:

  • Asset protection trust
  • Medicaid trust
  • Trust recently created at a person’s death
  • Revocable trust created by an older person

However, not all annuities are ideally suited to be owned by a trust.  Most of the time, it will make sense for an individual to own an NQDA, and to name one or more individuals as the beneficiary upon the owner’s death.

Do you own one or more nonqualified annuities?  Do you wonder whether ownership and beneficiary designation are correct?  Are you the trustee or beneficiary of a trust, and have questions about trust investments?  I would be glad to answer your questions.


Francine D. Ward
Attorney-At-Law, Author, Speaker

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