How to Set Up an Annuity for a Child

Annuities are financial contracts with an insurance company, designed to accumulate funds and generate future income through periodic payments. For parents or guardians, an annuity for a child can establish a financial foundation, contributing towards significant future expenses or providing income during adulthood. This approach involves long-term planning to grow assets for the child’s benefit.

Understanding Annuities for Minors

Annuities for minors typically use deferred annuities, which allow funds to grow over an extended period before payouts begin. Unlike immediate annuities, where payments start soon after investment, deferred annuities have an accumulation phase for contributions and growth, followed by a payout phase. Earnings within a deferred annuity grow on a tax-deferred basis, meaning taxes are generally not due until withdrawals or income payments begin.

Within deferred annuities, fixed and variable types are common. A fixed deferred annuity offers a guaranteed interest rate, ensuring predictable growth. A variable deferred annuity allows funds to be allocated into sub-accounts, similar to mutual funds, which can include stocks, bonds, or other market instruments. The growth of a variable annuity is tied to the performance of these underlying investments, introducing potential for greater returns but also carrying investment risk.

Parents or guardians often set up annuities for children with specific objectives. A primary purpose is to save for future educational expenses, such as college tuition. Additionally, an annuity can serve as a broader financial foundation, providing a sum or income stream when the child reaches adulthood. This can aid in a down payment on a home, starting a business, or offering financial security.

Key Decisions Before Establishing

Establishing an annuity for a minor requires considering ownership structures, as children cannot directly enter contracts. The most common approach uses a custodial account, such as those under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). An adult, the custodian, manages the annuity for the child’s benefit until the child reaches the age of majority, typically 18 to 21, or up to 25 in some states. Funds transferred into these accounts are an irrevocable gift to the minor. The custodian is legally obligated to manage assets prudently and solely for the child’s benefit.

Funding an annuity for a child involves gift tax considerations. Contributions are considered gifts to the minor. For 2025, individuals can give up to $19,000 to any single recipient without federal gift tax reporting requirements. Married couples can combine their exclusions, gifting up to $38,000 annually without gift tax implications. If contributions exceed this annual exclusion, the excess must be reported to the IRS on Form 709, which typically reduces the donor’s lifetime gift tax exemption.

Designating a beneficiary is another important step. While the child is typically named as the annuitant (the person whose life the payments are based on), a minor cannot directly receive inherited funds. An adult must therefore be designated to oversee any death benefits, similar to a trustee. Multiple beneficiaries can be named, and specific percentages assigned to each.

Future access to funds and payout options require careful thought. Annuities are designed for long-term growth and are generally illiquid until the child reaches adulthood or the payout phase. Withdrawals before the annuitant reaches age 59½ typically incur a 10% federal income tax penalty on the taxable portion, in addition to ordinary income taxes. Insurance companies may also impose surrender charges if funds are withdrawn before a specified contract period, which can range from four to eight years. Exceptions to the 10% penalty may apply in specific circumstances, such as death, total and permanent disability, or if distributions are part of a series of substantially equal periodic payments.

The Setup Process

Once preparatory decisions are made, the next phase involves establishing the annuity. The first step is selecting a reputable annuity provider. Review financial strength ratings from independent agencies like A.M. Best, Moody’s, Fitch Ratings, and Standard & Poor’s, as these indicate a company’s ability to meet long-term financial obligations. Understanding state guaranty association protections also provides security if an insurer becomes insolvent. Consulting a financial advisor can provide guidance in evaluating options and selecting a provider that aligns with specific goals.

After choosing a provider, complete the annuity application. This process generally involves filling out comprehensive forms, available online or in paper format. The application requires personal details for the custodian and the child, including full names, dates of birth, and Social Security numbers. Ensure all sections are completed accurately to avoid processing delays. The application also includes sections for designating beneficiaries.

Funding the annuity is the subsequent step, where the initial contribution is made. This can be done through methods like a direct bank transfer, personal check, or rolling over funds from another qualified retirement account. If ongoing contributions are planned, arrangements for regular payments can also be established. The chosen funding method will dictate necessary banking or account information required.

Upon completing the application and initial funding, submit documents to the annuity provider, either through a secure online portal or by mail. After submission, the provider will process the application. Once the annuity contract is issued, keep detailed records and regularly review statements to monitor performance and ensure information remains accurate.