Annuity vs. trust: How to use them in retirement planning
Good retirement planning isn’t just about saving — it’s also about choosing the right tools to protect and grow your money. Annuities and trusts are powerful tools for long-term financial planning.
A Fixed annuity is a contract between you and an insurance company that allows you to contribute a lump sum or periodic payments in exchange for guaranteed retirement income. A trust can be a legal arrangement where you (the grantor) give assets to another person or institution (the trustee) to hold and manage them for your beneficiaries. Beneficiaries could include you, your family members, charities, or others.
While both options can safeguard your money for support later in life, they do so differently.
This article explains how you can combine annuities and trusts to optimize tax benefits, reduce negative tax implications, and help ensure seamless estate planning.
Annuity vs. trust: Similarities and differences
Estate planning can require strategic use of sophisticated financial tools. Annuities and trusts are both popular tools for estate planning, and each offers a high degree of customization:
- With annuities, you can tailor them by adding death benefits and income riders to help protect and enhance income generation for your heir. These are insurance contracts, but the policies are still legally binding.
- Trusts are legal arrangements that can be customized to reflect the grantor’s wishes. The trustee has a fiduciary responsibility to adhere to those instructions when managing and distributing trust assets.
While both annuities and trusts can help you protect your assets and provide for beneficiaries, they function in fundamentally different ways.
Can a trust own an annuity?
Yes, a trust can own some types of annuities. In fact, it’s a common planning strategy, particularly for individuals who want control over how to distribute annuity income to their estate. Placing an annuity in a trust can help ensure heirs (often dependents) continue to receive income and helps avoid probate — the legal process of validating a will.
The trustee can purchase the annuity contract and manages the annuity according to the terms of the trust. When the time comes, the trust can distribute annuity payments to the beneficiaries as per the wishes of the creator of the trust.
Here are the annuity types that allow trust ownership.
Deferred fixed
A deferred fixed annuity can sit inside either a revocable trust or irrevocable trust. The funds grow tax-deferred, then can pass to the trust beneficiaries when the grantor passes away. The transfer of funds to beneficiaries is straightforward, bypassing probate.
Variable
Irrevocable trusts, such as charitable remainder trusts, often hold variable annuities. These annuities are invested in the market through subaccounts. This means underlying market performance determines whether the owner gains or loses money. The trust structure can help reduce estate taxes because the annuity is no longer part of the grantor’s taxable estate, while still allowing the money to grow tax-deferred until withdrawn.
Immediate
It’s rare for a trust to contain an immediate annuity because it makes immediate payouts that can lead to adverse tax consequences. Unlike a deferred annuity, which provides tax-deferred growth of earnings, an immediate annuity pays out income right away and taxes it annually. When a trust owns the annuity, it receives those payments — and because trusts can reach top tax rates sooner than individuals, annuity payments can push the trust into higher tax brackets faster.
Can a trust be an annuitant?
No, a trust can’t be an annuitant. An annuitant must be a natural person as insurance companies calculate annuity payments based on life expectancy. A trust doesn’t have a limited life expectancy, so the insurer can’t determine annuity payouts using the trust’s life.
A grantor can name a trust as the owner or beneficiary, but the annuitant (whose life determines the payment schedule) must be a specific individual.
How to transfer an annuity to a trust
Transferring an annuity to a trust can be a complicated process with significant tax implications. If not done correctly, you can lose the annuity’s tax-deferred status, leading to an unexpected taxable event. It’s imperative to consult a tax professional or attorney to discuss the specifics of your situation.
You should follow these steps when transferring an annuity to a trust.
1. Review contract for assignment/transfer clauses and surrender charges
Some annuities prohibit assignment (ownership transfer) or impose significant surrender charges (fee for withdrawing annuity before maturity) for moving assets from annuity before its term expires. At this juncture, it’s also important to see if your annuity can be an annuity held in a revocable trust.
2. Obtain certified trust documents and trustee resolution
Your insurer will typically require certified copies of the trust document or revocable trust certificate, along with a statement from the trustee authorizing the ownership transfer.
3. Contact the carrier/agent for the required forms
Do not use generic forms to complete this process. Contact your insurer to obtain the specific assignment and transfer forms and instructions.
4. Obtain carrier’s written acceptance (or denial) and document the effective date
Your insurance company must provide written acceptance of the transfer. It’s not final until then. This step establishes the effective date for the new trust ownership. Double-check things with a tax professional — designating the trust as beneficiary of an annuity, instead of naming an individual, can have different tax consequences.
5. Update beneficiary designation if desired
After the transfer of ownership, the trust can become the new beneficiary of the annuity contract. Confirm that the grantor (or a natural individual) remains the annuitant to avoid immediate tax consequences and preserve the annuity’s tax benefits.
Smart retirement planning with Gainbridge annuities
Don’t think of annuities and trusts as competing products. They’re retirement and legacy planning tools that can work in conjunction.
Inside the right type of trust, a deferred annuity can help you avoid probate and customize distributions to your heirs. While you must consider the potential tax implications and remember that a trust cannot be an annuitant, placing an annuity in a trust can help you efficiently transfer your wealth.
The Gainbridge SteadyPace™ tax-deferred annuity provides principal protection and guaranteed income so you don’t have to worry about running out of money in retirement. Make Gainbridge a part of your planning strategy to help preserve savings to support your beneficiaries after your passing.
Secure your financial future and provide for your heirs with Gainbridge today.
This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.
.jpeg)
