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An Introduction to Annuities in Trusts

Trusts can be complex planning tools, but understanding a few key fundamentals can help make conversations more effective and approachable.¹

General Types of Trusts

There may be dozens of trust structures, but most can be distilled into a few fundamental distinctions: Grantor vs. Non-Grantor (income tax treatment) and Revocable vs. Irrevocable (legal control and estate inclusion). Let’s start with some key definitions.

Trust Type	Definition	Key Features	Tax Treatment	Other Notes
Types of Taxation
Grantor Trust	A trust where an individual taxpayer (the grantor) is responsible for taxes on trust income.	Grantor retains certain control or benefits.	Income taxed at individual tax rates, regardless of whether income is distributed; often treated as disregarded entity for tax purposes.	Common structure for estate planning flexibility. May use the grantor’s Social Security Number (SSN).
Non-Grantor Trust	A trust where the grantor is not considered the owner of the underlying assets for income tax purposes and the trust acts as a separate taxpayer.	Operates independently from the grantor.	Files its own tax return (Form 1041); retained income taxed at trust tax rates.	May provide creditor protection. Has own Employer Identification Number (EIN).
Types of Control
Revocable Trust	Also called a “living trust”; allows the grantor to retain control of assets.	Can change terms, designate beneficiaries, avoid probate, and name a successor trustee.	Treated as a grantor trust during the grantor’s life.	Becomes irrevocable and transitions to a separate taxpayer for income tax purposes at death. May not provide asset protection during life.
Irrevocable Trust	A trust where the grantor permanently transfers ownership and control of assets.	Assets managed by trustee; grantor gives up control.	May be treated as grantor or non-grantor.	Assets generally excluded from taxable estate. May provide asset and creditor protection.

¹For informational and educational purposes only and should not be construed as tax, investment or legal advice. Before engaging in any strategy or purchasing any product, individuals should consult with qualified legal and tax professionals who are familiar with your unique circumstances.

Classifying Trusts

1. Is the trust revocable?

Can the grantor modify or revoke the trust?

Revocable Trust

Can be changed anytime
Avoids probate
No asset protection

2: What is the grantor status

Is the grantor the taxpayer for the trust?

Grantor Trust*

Income taxed to the grantor
Typically uses the grantor's SSN

*Rare exception - Some foreign trusts can be classified as revocable non-grantor trusts.

Irrevocable Trust

Cannot be changed without external intervention
Removes assets from the Estate
May provide asset protection

2: What is the grantor status

Is the grantor the taxpayer for the trust?

Grantor Trust

Income taxed to the grantor
Individual Tax Rates

Non-Grantor Trust

Separate Taxpayer
Income may be taxed to trust or beneficiaries depending on structure

Parties to a Trust

The parties to a trust is one of the most important elements of a trust to understand.

Role	Definition	Key Responsibilities/ Notes
Grantor / Settlor / Trustor²	The party that creates a trust, usually the donor.	Transfers legal title of assets to the trustee and specifies how the property should be used for beneficiaries.
Trustee	A third party authorized to execute and manage the trust.	Can be an individual or corporate entity; legally responsible for administering the trust according to its terms.
Beneficiary	The individual(s) or entity(ies) for whom the trust assets are managed.	Receives income or principal distributions; must be clearly defined for the trust to be valid.

² IRC §§ 671-678

Annuity Contract Structuring

A trust can serve in two primary roles within an annuity contract: as the owner or as the beneficiary.

OWNER (Trust as Owner)

Purpose

Controls distributions through trust terms
Helps avoid probate
May provide creditor protection (state-dependent)

Key Considerations

Naming the trust as both the owner and beneficiary may help ensure assets are administered according to trust terms.
Prevents assets from bypassing the trust
Non-grantor trusts may lose tax deferral if not acting for a natural person³

Eligibility

Typically non-qualified annuities only
Exception: Trust as beneficiary may hold an inherited IRA

BENEFICIARY (Trust as Beneficiary)

Purpose

Determines who receives annuity assets at death
Critical to ensure alignment with estate plan

QUALIFIED ANNUITY (IRA)

If a See-Through Trust:

Uses underlying beneficiary rules
Potential for more favorable distribution timing
Must meet IRS requirements (valid trust, identifiable beneficiaries, proper documentation)

If NOT a See-Through Trust:

Treated as Non-Designated Beneficiary(SECURE act)
Potentially less favorable / accelerated distribution rules

Distribution depends on:

Age of IRA owner at death
Trust classification
Beneficiary structure

NON-QUALIFIED ANNUITY

Default Rule:

5-Year Rule Full distribution by 5th anniversary of death⁴

After Annuity Start Date:

Must follow "at least as rapidly" rule⁵

³ IRC §72(u)
⁴IRC §72(s)(1)(B)
⁵IRC §72(s)(1)(A)

Key Takeaways

Structure Matters:

Consider aligning Owner + Beneficiary designations
Trust classification drives tax & distribution outcomes
- Always coordinate with legal + tax advisors

Working with Annuities in Trusts:

To effectively position an annuity in a trust, it’s essential to first understand the trust’s key components. Asking four targeted questions can help uncover the critical details needed to identify the most appropriate strategy.

Is this a Grantor or Non-Grantor trust?
Why? This helps you understand who will be responsible for the income taxes.
Has anyone associated with the trust passed away?
Why? If the grantor has passed, the trust may no longer be a grantor
trust.
Are all of the trust beneficiaries natural people?
Why? If the trust has non-natural beneficiaries it may not be eligible for tax deferral.⁶
Is the trust going to take income soon, later, or never?
Why? There can be different tax implications depending on if and when they take income.

⁶IRC §72(u)

Potential Opportunities

Pass-in-Kind Strategies

Consider utilizing annuities within a trust to capture tax-deferred growth
Structure for an in-kind transfer to help preserve accumulated value
Reduce tax drag while supporting efficient wealth transfer
May be well-suited for tax-sensitive clients with long-term legacy goals

Multi-Generational Income

Consider using income annuities to provide predictable, guaranteed cash flow to a trust
Help create and sustain a lasting financial legacy across generations
Support ongoing distributions, family needs, and long-term planning goals
Extend a reliable income stream to future beneficiaries

Growing a Death Benefit

Consider leveraging annuities that offer tax-deferred growth and enhanced death benefits
Help ensure liquidity is available when needed within the trust
Support beneficiaries and obligations while improving overall trust efficiency

Notes

Insurance companies generally do not interpret trust language; therefore, an attestation from the trustee is typically required to ensure proper administration of the annuity.
Clients are encouraged to consult with their tax and legal advisors prior to submitting an application.
For additional support, please contact your Global Atlantic wholesaler or the sales desk at (833) ASK-GA4U (833-275-4248) and request the Advanced Markets team.

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