With increasing interest rates, you may want to know how your business can invest in an annuity account. In most cases corporations, partnerships, trusts, and other entities can own an annuity. This process works much like it would with individual ownership.
That’s the good news, but there are subtle differences in how these accounts operate on a tax and operational basis. You’ll want to understand what to expect from this structural change to avoid issues later.
First There Must Be An Annuitant
Annuity accounts are annuitant-driven. This means even though a trust, partnership, or corporation can own an annuity, the investment must be based on a living person. The same is true with life insurance. Entities can own a life insurance policy, but it’s still based on someone’s life.
So there must always be an annuitant. While this person(s) may not own the policy outright, the contract is based on their life. In other words, the owner (corporation, trust, etc.) and the insured (person) are different.
Once the last annuitant passes away (some policies have joint annuitants), then the policy would end based on the contract terms.
A corporation, trust, or other entity cannot continue contracts indefinitely. There must be a living annuitant listed on the policy. Once one or both annuitants pass away, you cannot appoint a new insured. The policy would end at that time.
An entity can own an annuity contract so long as it’s based on a living person listed as the annuitant(s). This person might be an owner, president, or officer of the company.
Annuities Have Unique Tax Features
Annuities grow tax-deferred. Owners can defer taxes for their lifetime if they wish. The annuitant (or the annuitant’s estate) pays the taxes on that growth at passing. This setup takes advantage of compounding interest.
The taxation of annuities works differently when owned by an entity. A trust, partnership, business, or corporation that owns an annuity cannot defer taxes like a natural person.