Can You Buy an Annuity for Someone Else?

An annuity is a financial contract where an individual pays an insurance company a lump sum or premiums in exchange for regular payments later. Annuities offer a guaranteed income stream, often for retirement. Purchasing an annuity for another person involves specific structural, legal, and tax considerations.

Key Annuity Roles

An annuity contract involves distinct roles. The “Owner” is the individual or entity who purchases and funds the annuity, maintaining control over its terms, including withdrawals and beneficiaries. The “Annuitant” is the person whose life expectancy determines the timing and duration of annuity payments. While often the same, the Owner and Annuitant can be different, which is fundamental to purchasing an annuity for someone else.

The Annuitant receives the annuity payouts, with their life expectancy determining the payment schedule. The “Beneficiary” is designated by the Owner to receive any remaining contract value or death benefits upon the death of the Annuitant or Owner.

Structuring Third-Party Annuity Purchases

Purchasing an annuity for someone else fundamentally involves separating the roles of the Owner and the Annuitant. The individual who pays for the annuity becomes the Owner, while the person intended to receive the payments is designated as the Annuitant. The Owner retains control over the annuity contract, making decisions about its terms, contributions, and beneficiaries. The Annuitant’s life expectancy remains the basis for calculating income payout periods.

A common scenario for third-party annuity purchases involves using a trust as the Owner, particularly when providing for minor children or individuals with special needs. When a trust owns the annuity, it acts as the legal entity holding the contract, with the trustee managing it for the benefit of the designated Annuitant and Beneficiary. This structure can provide a controlled distribution of funds. For instance, a parent or grandparent might set up a trust to own an annuity for a child, where the child is the Annuitant.

The use of a trust can also offer protective measures, such as safeguarding assets for individuals who may not be able to manage their finances independently or for special needs planning. The trust should be structured as an irrevocable trust and for the benefit of a living person to maintain its tax-shelter status for estate planning. This separation of roles allows for flexibility in financial planning, enabling someone to provide a future income stream or financial security for another person without relinquishing all control over the asset immediately.

Tax Implications of Third-Party Annuities

Purchasing an annuity for another individual introduces tax considerations related to gift tax, income tax, and estate tax. When an individual pays premiums for an annuity owned by or benefiting someone else, it constitutes a gift. This gift may be subject to federal gift tax if its value exceeds the annual gift tax exclusion. For 2025, the annual gift tax exclusion allows an individual to give up to $19,000 per recipient without incurring gift tax reporting requirements. Married couples can effectively double this amount to $38,000 per recipient if they elect to split gifts.

If the gifted amount surpasses the annual exclusion, the giver must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. Exceeding the annual exclusion does not automatically trigger an immediate tax payment; instead, the excess amount reduces the giver’s lifetime gift tax exemption. For 2025, the federal lifetime gift and estate tax exemption is $13.99 million per individual, which can be combined for married couples to $27.98 million. This exemption allows individuals to transfer substantial wealth over their lifetime or at death without federal gift or estate taxes.

Distributions from non-qualified annuities, which are purchased with after-tax dollars, are taxed on the earnings portion only. The recipient of the annuity payments, whether the Annuitant or a Beneficiary, is responsible for paying income tax on the taxable portion of withdrawals or income payments. If the Owner dies and the annuity is inherited by a Beneficiary, the Beneficiary will owe income tax on the annuity’s earnings. Additionally, withdrawals from an annuity before the Annuitant reaches age 59½ may be subject to a 10% federal tax penalty, unless a specific exception applies.

Annuities also have estate tax implications if the Owner passes away before the Annuitant. The value of the annuity contract is included in the deceased Owner’s gross estate for federal estate tax purposes. The lifetime gift tax exemption is unified with the estate tax exemption, meaning any portion of the exemption used for gifts during life reduces the amount available for estate tax purposes at death.

Considerations for Annuity Selection

When considering an annuity purchase for someone else, understanding the different types of annuities available is important, as each serves distinct financial objectives. Immediate annuities begin providing income payments soon after purchase, typically within one year. These are often suitable when the Annuitant requires an immediate income stream, such as for current living expenses or to supplement retirement income. Immediate annuities are funded with a single lump-sum payment and do not have an accumulation period.

In contrast, deferred annuities are designed for payments to begin at a future date, allowing the initial premium and any subsequent contributions to grow tax-deferred over an accumulation period. This type of annuity can be appropriate if the Annuitant does not need immediate income and the goal is to provide a future income stream, such as for retirement several years down the line. Deferred annuities offer the opportunity for the investment to grow over time before payouts commence.

Fixed annuities offer a guaranteed interest rate and predictable income payments, providing stability and security. The insurance company guarantees a set return, making them suitable for Annuitants with a low tolerance for investment risk. Variable annuities, however, allow the Owner to allocate funds among various investment subaccounts, similar to mutual funds. The value and future payments of a variable annuity fluctuate based on the performance of these underlying investments, carrying a higher potential for growth but also exposing the Annuitant to market risk.