How to use annuities with trusts

Annuities and trusts can be combined in some very strategic ways, but the “best” setup depends on your goals (e.g., tax deferral, probate avoidance, legacy planning, or asset protection). Here’s a structured overview:

 Key Ways to Use Annuities with Trusts

1.  Naming the Trust as the Owner and Beneficiary

• How it works: The trust owns the annuity and is also the beneficiary at death.
• Why use it: Provides control over how annuity proceeds are distributed (especially useful if beneficiaries are minors, disabled, or financially irresponsible). You can also set up multiple annuity products for each beneficiary or heir, providing even more control.
• Caution: This may reduce certain tax deferral benefits, since trusts do not get the same stretch payout options as individuals. Usually, the annuity must be distributed within 5 years or over the trust’s oldest beneficiary’s life expectancy.

2. Naming the Trust as Beneficiary Only

• How it works: The individual owns the annuity, but the trust is listed as the beneficiary at death.
• Why use it: The annuity grows tax-deferred during the owner’s lifetime, and after death the proceeds flow into the trust for controlled distribution.
• Best use cases: When you want tax deferral during life, but still need the trust to manage/control funds for heirs.

3. Special Needs Trust (SNT) + Annuity

• How it works: The annuity funds are paid into a Special Needs Trust.
• Why use it: Helps provide for a disabled beneficiary without disqualifying them from government benefits like Medicaid or SSI.

4. Charitable Remainder Trust (CRT) + Annuity

• How it works: The CRT owns the annuity, providing income to you (or another person) for life or a set period, with the remainder going to charity.
• Why use it: Creates a charitable deduction, provides lifetime income, and removes assets from your taxable estate.

5. Irrevocable Life Insurance Trust (ILIT) Funded with an Annuity

• How it works: An annuity pays income into an ILIT, which is then used to purchase life insurance.
• Why use it: Multiplies the value of annuity payments for heirs, keeps life insurance proceeds estate-tax free.

 Important Considerations

• Tax rules: Trusts don’t get the same favorable tax treatment as individuals on annuities. Income can be taxed more quickly if the trust is the owner/beneficiary.
• RMDs (Required Minimum Distributions): If the annuity is inside an IRA and a trust is named as beneficiary, payout options may be limited.
• State laws: Some states treat annuities inside trusts differently (especially regarding creditor protection).
• Control vs. efficiency: Trusts give you control over how and when beneficiaries receive money but can complicate taxation and reduce flexibility.

 Best practice (in many cases):

• Own the annuity in your name for lifetime tax deferral.
• Name the trust as beneficiary (not owner) if you want controlled distributions after death.
• Use a carefully drafted trust (conduit vs accumulation) to preserve as much stretch potential as possible.