Does an Annuitant Have to Be a Natural Person?

Annuities are financial contracts designed to provide a steady income stream, often utilized for retirement planning. These agreements, typically established with an insurance company, involve initial payments—either a lump sum or a series of contributions—in exchange for regular payouts later. A frequent inquiry arises regarding the specific individuals or entities that can fulfill the various roles within an annuity contract, particularly concerning the annuitant.

Understanding the Annuitant Role

The annuitant is the individual whose life expectancy serves as the basis for determining the duration and amount of the annuity payments. This person is typically the recipient of the income distributions once the annuity begins its payout phase. While the annuitant is central to the payment schedule, they do not necessarily control the annuity contract itself.

The annuity owner, in contrast, is the person or entity who purchases the contract and maintains all control over it. The owner can make decisions such as designating the annuitant, selecting beneficiaries, making withdrawals, or surrendering the contract. A beneficiary is the individual or entity designated to receive any remaining annuity value or payments upon the death of the annuitant or owner, depending on the contract’s terms. While these roles can sometimes be held by the same person, they represent distinct legal and contractual positions within the annuity agreement.

The Natural Person Requirement for Annuitants

For an annuity contract to maintain its tax-deferred growth status, the annuitant must be a natural person. This rule is codified in Internal Revenue Code (IRC) Section 72(u). The primary reason for this requirement is to prevent indefinite tax deferral on investment gains.

If a non-natural person, such as a corporation or a perpetual trust, were allowed to be the annuitant, the income earned within the annuity could potentially avoid taxation indefinitely. This rule ensures investment growth is eventually subject to income tax. Consequently, if a non-natural person is designated as the annuitant, the contract may not be recognized as an annuity for federal income tax purposes.

Implications for Non-Natural Person Ownership

Confusion often arises when a non-natural person, such as a trust, corporation, or partnership, owns an annuity contract. A non-natural person can own an annuity, provided a natural person is designated as the annuitant. In these circumstances, the annuity contract retains its tax-deferred status.

The key distinction lies in the role: ownership by a non-natural entity is permissible as long as the measuring life for payouts—the annuitant—remains a natural person. For example, a trust might own an annuity for the benefit of a natural person, who then acts as the annuitant. Distributions from such annuities, while tax-deferred during growth, will be subject to the owning entity’s tax rules upon withdrawal or annuitization, which may vary depending on the entity’s structure.

Consequences When a Non-Natural Person is the Annuitant

When a non-natural person is designated as the annuitant of an annuity contract, the contract loses its tax-deferred status. The income earned on the contract becomes taxable annually as ordinary income to the owner.

There are limited exceptions to this rule, such as annuities held by a trust or other entity acting solely as an agent for a natural person. Annuities purchased within qualified retirement plans, like 401(k)s or Individual Retirement Accounts (IRAs), are exempt from this rule because the underlying beneficiaries are natural persons, even if the plan itself is the nominal owner. For most other scenarios, designating a non-natural person as the annuitant triggers immediate annual taxation, eliminating the primary tax benefit of an annuity.