Deferred Annuities in Trusts
Always Check With Your Tax Advisor
California seniors often create trusts for holding assets. Trusts provide ease of administration in the event of incapacity and avoid interruption by probate proceedings at death. But a trust may not be an appropriate ownership vehicle for all of your assets. In particular, think twice about transferring to a trust any deferred annuities you own or may acquire. There may be serious tax consequences to any such transfer. The California annuity and financial elder abuse attorneys at our firm represent clients who have incurred tax losses on transfers, replacements, and surrenders of deferred annuities. If you are over age 60 and have suffered a tax loss on the surrender or replacement of a deferred annuity here in California call the Evans Law Firm today at (415)441-8669 for a free consultation.
The “standard” tax treatment for deferred annuities is that they are, as the name suggests, tax-deferred. The tax deferral is always a strong selling point by agents but remember that any withdrawal is taxed as ordinary income. And also remember that the deferral benefit is limited based on who owns the annuity. The Code expressly prohibits deferral treatment where the annuity is not held by a “natural person” (i.e., a living, breathing human being). I.R.C. § 72(u). In fact, when an annuity is held by a corporation or other business entity, any gains in the contract will be taxable annually as ordinary income. The exception to the 72(u) “natural person rule” is that if an annuity is held “by a trust… as an agent for a natural person” it will still be eligible for tax-deferral treatment.
Unfortunately, the tax code itself does not describe what constitutes “an agent for a natural person” and the rules are not entirely clear from the supporting Treasury Regulations, either. One important rule, however, does emerge from the regulations: for a trust to qualify as an “agent for a natural person” all the beneficiaries, both income and remainder, current and future, must be natural persons.
Settlors must keep the rule in mind for transfer of annuities to a trust. In the case of a transfer to a revocable living trust, this is not an issue, as the annuity is not treated as transferred for income or estate or gift tax purposes, and accordingly there has been no “transfer” to which a full-and-adequate-consideration exchange can be considered. For tax purposes, the ownership is the same before and after the transfer. Transfers to irrevocable trusts are more complicated.
The bottom line when it comes to tax treatment of deferred annuities in trusts is this: while annuities can be owned by trusts in many situations, and transferred into or out of many (but not all) types of trusts, it’s important to understand the particular details of the trust and its beneficiaries to determine the tax treatment of the transaction. When it comes to annuity and trust taxation, all trusts are not created equal! Make sure always to consult with your tax advisor about any annuity transaction, especially if a trust is involved.
If you or a loved one is over 60 and live here in California and has suffered a tax loss as the result of the surrender or replacement of a deferred annuity, contact San Francisco and California annuities and financial elder abuse attorney Ingrid Evans and the other attorneys at Evans Law Firm, Inc at (415) 441-8669, or by email at <a href=”mailto:firstname.lastname@example.org”>email@example.com</a> for a free review of your policy. Our attorneys have experience with complex financial contracts, annuities, and large insurance companies. If you have grounds for a case against an agent or carrier, we can help guide your case through a jury trial or toward an equitable settlement. We handle cases involving physical and financial elder abuse, qui tam and whistleblower law, nursing home abuse, whole life insurance and universal life insurance, and indexed, variable, and fixed annuities.
Some of the major annuity and life insurance providers in California are listed below. We do not suggest that these carriers have done anything wrong. Rather, the list is provided solely for our readers’ convenience.
Athene Annuity and Life Company
AXA Equitable Life Insurance Company
Bankers Life Insurance and Casualty Company
EquiTrust Life Insurance Company
Fidelity & Guaranty Life Insurance Company
Forethought Life Insurance Company/Global Atlantic Financial Group
Genworth Life Insurance Company
Global Atlantic Financial Group/Forethought Life Insurance Company
Guardian Life Insurance Company
Guggenheim Partners/Security Benefit Life Insurance Company
ING USA Annuity and Life Insurance Company
Jackson National Life Insurance Company
John Hancock Life Insurance Company
Life Insurance of the SouthWest/National Life Group
Lincoln Financial Group/The Lincoln National Life Insurance Company
MassMutual/Massachusetts Mutual Life Insurance Company
MetLife/Metropolitan Life Insurance Company
Midland National Life Insurance Company
Mutual of Omaha/United of Omaha Life Insurance Company
National Life Group/Life Insurance of the SouthWest
New York Life Insurance Company
Northwestern Mutual Life Insurance Company
Pacific Life Insurance Company
Principal Life Insurance Company
Pruco/Prudential Life Insurance Company
RiverSource Life Insurance Company/Ameriprise Financial
Security Benefit Life Insurance Company/Guggenheim Partners
Symetra Life Insurance Company
Transamerica Life Insurance Company
United of Omaha Life Insurance Company/Mutual of Omaha
Unum Life Insurance Company of America
Voya/Reliastar Life Insurance Company
 We do not, however, provide investment or tax advice. Always check with your tax advisor before making any transaction involving deferred annuities.