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However, if other beneficiaries are involved – even and including charities – a trust-owned annuity may lose its preferential treatment.An even more complex point of intersection between annuities and trusts is when annuity contracts are transferred to/from a trust.Note – a Solo 401K Plan is also known as an Individual 401K Plan or a Self Directed Solo 401K Plan.In the event that an eligible distribution is taken from a Solo 401K Plan and the Plan Administrator and not the financial institution is responsible for reporting the distribution, the Plan Administrator would be required to do the following: 1.The favorable rules are generally intended to support the use of annuities as a vehicle for retirement savings and/or retirement income…and as such, the rules generally only apply in situations where annuities are owned directly by individual, living, breathing human beings who may in fact someday retire (known in the tax code as “natural persons”).Please refer to information on How to Request Public Documents.
The rules do allow that when a trust owns an annuity “as an agent for a natural person” the contract can still keep its tax-deferral treatment, such as when it’s owned by a revocable living trust; even if merely all the beneficiaries the trust are natural persons, such as with a bypass trust for the benefit of a surviving spouse and children, favorable treatment is still available.
as an agent for a natural person” it will still be eligible for tax-deferral treatment.
(Michael’s Note: It’s important to remember that in the case of annuities owned inside of IRAs or other retirement accounts, the tax rules of retirement rules are controlling, including the tax-deferral treatment for retirement accounts; IRC Section 72 and its associated rules and regulations apply only to so-called “non-qualified” annuities held outside of retirement accounts.)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.
By contrast, in PLR 9009047, the trust’s remainder beneficiary was a charitable organization and not a natural person, so the tax-deferral treatment was lost; similarly, in PLR 199944020 found that a partnership holding an annuity would not be eligible for tax-deferral treatment, as a partnership is a business entity unto itself and not merely the nominal owner for a natural person beneficiary.
The basic conclusion from the rules – while a formal legal agency status is not required (at least based on the most recent rulings), 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.
Important Note: This page contains Division of Investment Management no-action letters dated on or after January 1, 1993.