Do you have an annuity? Is this a financial tool you created for your own future but is something that was ultimately moved out of your possession/estate and into the management of a trust? An insurance company plays a crucial role in managing annuities, especially when they are owned by a trust. Read on to learn more about key issues that emerge with trusts owned by annuities.
If you have placed an annuity inside a trust, this can get very confusing regarding the beneficiary designation. You should have a working knowledge of the type of annuity you have selected and how these individual annuities function. Recognize at first that not all annuities are the same.
One of the most important ways to tell the difference between products is whether the money that went into the annuity was taxed before or after it was earned. This is basically asking whether or not this is an investment account or a retirement account. An annuity could be part of your IRA investments and any annuity that has been funded with pre-taxed retirement dollars is referred to as a qualified annuity.
With a qualified annuity, ownership should most likely not be transferred to the trust itself. If an annuity was paid for with money that was after taxes, it is likely that it should be put into a trust so that a new trustee can manage it along with other trust assets. Book a meeting with an estate planning lawyer to make sure this is the right thing for you to do.
Are you juggling retirement planning and estate management? You’re not alone! One question I get asked a lot is whether a trust can own an annuity. The short answer is yes, a trust can definitely own an annuity—but there’s way more to it than that simple answer suggests.
As someone who’s helped many clients navigate these waters I can tell you that the intersection of trusts and annuities has some pretty interesting twists and turns. Let’s dive into what you really need to know about trust-owned annuities in 2025.
What Exactly is a Trust-Owned Annuity?
A trust-owned annuity is exactly what it sounds like—it’s an annuity that’s owned by a trust rather than by an individual person. When this happens, the trustee typically purchases the annuity and names the trust itself as the beneficiary.
A trust can own an annuity, but it can’t be the person who gets the money from it. The person who gets the annuity must always be alive, and their life expectancy is used to figure out how much they will get paid. When a trustee buys an annuity, they usually name themselves as the annuitant.
Key Facts About Trust-Owned Annuities
Before we dive deeper let’s get some basics straight
Does the Type of Trust Matter?
You bet it does! The type of trust you have makes a huge difference when considering whether to place an annuity in it.
Irrevocable Trusts
If you place an annuity in an irrevocable trust, you might gain:
- Creditor protection benefits
- Potential exclusion from your taxable estate
But there is a catch: irrevocable trusts can’t be changed, so it will be hard to change the annuity or its beneficiaries in the future.
Revocable Trusts
With a revocable trust, you can change the annuity or the people who get it whenever you want. While this gives you a lot of freedom, it also means that the annuity will probably be taxed as part of your estate. This could mean a big tax bill.
Benefits of Putting an Annuity in a Trust
There are several potential advantages to having a trust own an annuity:
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Asset Protection: Trusts can shield assets from creditors and legal judgments, helping preserve wealth for future generations.
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Control Over Distributions: As a donor, you can say exactly how and when the beneficiaries get their money. This is very helpful if your beneficiaries are minors or people who don’t know much about money.
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Estate Planning Advantages: In some cases, proper structuring can help reduce estate taxes.
One of my clients, a retired teacher, placed her annuity in a trust to ensure her grandchildren would receive funds only after completing their education—talk about motivation!
Drawbacks of Trust-Owned Annuities
It’s not all sunshine and roses though. There are some significant potential downsides:
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Tax Complications: The transfer-for-value rule could trigger adverse tax consequences if the annuity is sold or transferred.
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Loss of Tax Deferral: Unlike individually-owned annuities, trusts may not receive the same tax-deferred growth benefits.
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Higher Tax Rates: Trust income is often taxed at higher rates than individual income.
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Administrative Complexity: Managing an annuity within a trust requires careful administration.
Tax Implications: The Big Consideration
This is where things get a bit tricky, so pay attention!
Regular Annuities vs. Trust-Owned Annuities
With a regular annuity owned by an individual, growth is typically tax-deferred until funds are withdrawn. But with a trust-owned annuity, it’s a different story.
If the trust is named as the annuity owner (rather than just the beneficiary), the annuity loses its tax-deferred benefit. Why? Because an annuity’s growth is only tax-deferred if the owner is a natural person. When a trust owns it, any growth becomes taxable income.
Trust Tax Rates
Trust tax rates are compressed compared to individual rates. In 2025, trusts reach the highest tax bracket much faster than individuals do. For example, a trust might hit the highest tax bracket with just $14,000 of income, while an individual might need to earn over $500,000 to reach the same bracket.
This table shows how dramatic the difference can be:
| Income Level | Individual Tax Rate | Trust Tax Rate |
|---|---|---|
| $10,000 | 10-12% | 24% |
| $14,000 | 12% | 37% |
| $100,000 | 24% | 37% |
When a Trust-Owned Annuity Makes Sense
Despite the potential drawbacks, there are situations where having a trust own an annuity makes perfect sense:
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When Beneficiaries Need Protection: If your beneficiaries include minors, individuals with special needs, or those who might not manage money well, a trust can provide structure and protection.
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Asset Protection Planning: For professionals in high-liability fields (doctors, lawyers, etc.), placing assets in certain types of trusts can provide protection from potential lawsuits.
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Complex Family Situations: Blended families or situations with multiple beneficiaries might benefit from the clear distribution rules a trust provides.
When to Avoid Trust-Owned Annuities
On the flip side, there are clear situations where you should probably avoid placing an annuity in a trust:
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If Your Goal is Probate Avoidance: Annuities already avoid probate on their own, so there’s no additional benefit from placing one in a trust for this purpose.
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Non-Individual Beneficiaries: If the beneficiary is a business or organization rather than a person, some advantages of trust-owned annuities won’t apply.
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Multiple Beneficiaries: Having multiple beneficiaries can complicate the administration of a trust-owned annuity.
How to Transfer an Annuity to a Trust
If you’ve decided that a trust-owned annuity is right for your situation, here’s how to make it happen:
- Contact the insurance company that issued your annuity
- Request the necessary paperwork for transferring ownership
- Complete the paperwork with notarized signatures
- Submit the paperwork to your provider
For tax purposes, it’s generally recommended to transfer the annuity into an irrevocable trust in which you have no ownership interest. This helps avoid estate tax complications.
Be aware that transferring an existing annuity to a trust may be considered a taxable withdrawal, resulting in you having to pay taxes when the transfer occurs.
Frequently Asked Questions
I get tons of questions about trust-owned annuities. Here are answers to some of the most common ones:
Can any type of annuity be owned by a trust?
Technically yes, but some types work better than others. Fixed annuities and immediate annuities often work better in trusts than variable annuities, which have more complex tax considerations.
Will I lose control of my annuity if I put it in a trust?
It depends on the type of trust. With a revocable trust, you maintain control. With an irrevocable trust, you generally give up control—that’s the tradeoff for the additional benefits.
Can I name both a trust and individuals as beneficiaries of an annuity?
Yes, you can split beneficiary designations between a trust and individuals, but this adds complexity and should be done with professional guidance.
The Bottom Line: Get Professional Help
Look, I’m gonna be straight with you—the intersection of annuities and trusts is complex. Both have their own sets of rules, and when you combine them, things can get tricky fast.
Before making any decisions about placing an annuity in a trust, it’s crucial to consult with:
- A qualified financial advisor
- An estate planning attorney
- A tax professional
These experts can help ensure that your trust-owned annuity aligns with your overall financial and estate planning goals.
I’ve seen too many people make costly mistakes trying to DIY this process. Trust me (no pun intended), the professional fees are worth it when you consider what’s at stake.
My Take on Trust-Owned Annuities
After helping numerous clients navigate this decision, my personal opinion is that trust-owned annuities can be powerful tools when used correctly—but they’re not for everyone.
The best candidates tend to be:
- High-net-worth individuals with estate tax concerns
- People with complex family situations
- Those with beneficiaries who need structured financial support
If you’re considering this option, start by clearly defining your goals. What are you trying to accomplish? Once you know that, you can determine if a trust-owned annuity is the right vehicle to get you there.
Remember, there’s no one-size-fits-all solution in financial planning. What works brilliantly for your neighbor might be completely wrong for you.
Have you had experience with trust-owned annuities? I’d love to hear about it in the comments below!
Disclaimer: This article is intended for informational purposes only and should not be considered financial, legal, or tax advice. Always consult with qualified professionals before making decisions about annuities, trusts, or other financial matters.
Benefits of Trust-Owned Annuities
There are several benefits to owning an annuity in a trust, making it a valuable tool in estate planning. One of the main benefits is the potential for tax-deferred growth. By placing an annuity in a trust, the annuity can grow without being subject to income tax until the funds are withdrawn. This tax-deferred growth can be especially beneficial for individuals looking to accumulate wealth over time, as it allows the annuity to compound and grow more efficiently.
Another significant benefit of trust-owned annuities is asset protection. When an annuity is placed in a trust, the assets are generally protected from creditors and lawsuits. This can give the person who leaves the annuity and the people who receive it peace of mind, knowing that it is protected against possible financial threats.
Trust-owned annuities also offer flexibility in terms of distribution. The trust can be set up so that the annuity payments are given to beneficiaries in a way that saves the grantor money on taxes and meets their needs. This can include setting up the distributions so that the beneficiaries pay the least amount of taxes or have a steady stream of income over time.
Overall, trust-owned annuities can provide significant tax benefits, asset protection, and flexibility, making them a powerful tool in wealth management and estate planning.
Tax Implications of Annuities in Estate Planning
The tax implications of annuities in estate planning can be significant and multifaceted. Annuities are considered taxable income, and the tax treatment of withdrawals depends on the type of annuity and the beneficiary designations. For example, a trust-owned annuity may be subject to income tax on the annuity payments, which can impact the trust’s overall tax liability. Additionally, the tax-deferred growth of a deferred annuity can create substantial tax consequences when withdrawals are made. Understanding these tax implications is essential to ensure that annuities are used effectively and efficiently within an estate plan. Proper planning can help mitigate potential tax burdens and maximize the financial benefits for beneficiaries.