You may want to know how your business entity works with an annuity account. In most cases corporations, partnerships, trusts, and other entities can own an annuity much like an individual would.
That’s the good news, but there are some subtle differences to how these accounts operate on a tax and operational basis. You’ll want to understand what to expect from this arrangement going forward in order 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 still 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) can be different.
Once the last annuitant passes away (some policies have joint annuitants), then the policy would come to an 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 or persons listed as the annuitant(s).
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) pay the taxes at passing. This takes full advantage of compounding growth.
The taxation of annuities works differently when owned by an entity. A trust, partnership or corporation that owns an annuity cannot defer taxes like a natural person.
All corporately owned annuity accounts are non-qualified. If the owner was a person, then yes, taxes can be deferred. However, IRS rules state when a business entity owns an annuity, it would be subject to normal yearly income taxes based on the policy growth. The tax ID of the corporation, partnership, etc would receive the 1099 each year.
One of the big advantages to annuities is tax-deferral. This feature is lost if a non-person is listed as the owner.
How Do Annuities Work With Trusts?
Most trusts are revocable and simply setup to avoid probate. Annuity accounts avoid probate by way of beneficiary designations. Thus, you may have a couple of choices on how to establish ownership.
Some consumers make a trust the owner of the annuity whiles others will make their trust the beneficiary. Your best way forward may depend on the type of trust you have and how your wish to bequeath the proceeds.
When working with trusts, it’s best to talk with your lawyer and tax advisor to confirm you’re taking advantage of all the benefits annuities offer. In some cases, you and/or your beneficiaries will unnecessarily lose tax advantages if your annuity is established improperly.
Are These Contracts Safe & Insured?
Other than tax implications, most other annuity features are the same when owned by an entity. Contracts are insured up to $250,000 in most states. You’ll want to refer to your State Life & Health Guaranty Association to view their rules and requirements.
Distributions, liquidity, income withdrawals and surrender charges would all be the same as listed in the contract.
Some annuities carry more risk than others. Variable accounts buy into the market and go up… and down. Fixed, indexed and deferred accounts do not own market instruments and do not lose value when the market drops.
Your best option depends on your risk tolerance. Most of our clients look for the reliable returns of indexed and fixed annuity quotes. We can help you compare your best options.
Contact Us To Learn More
Hyers and Associates is an independent insurance brokerage. We offer policies from several highly-rated companies. We’ll help you find the corporate annuity account that best suits your needs and risk tolerance.