Tax Guru – Ker$tetter Letter

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Annuities & Trusts

Posted by taxguru on February 11, 2006

Q:

Subject: Annuities in a irrevocable trust – Tax Deferred?

 Hello Kerry,

I am considering purchasing an annuity for my brothers trust.  This trust is an irrevocable special needs trust where my brother is the beneficiary.  The trust was designed to preserve the bequest from my dad, target it for growth should the money be needed to take care of John, and to be careful not to disqualify John from and State or Government benefits.     

I have posed the question that since the trust is a non-natural personal will the tax deferral benefit of an annuity be void and will the trust be taxed on growth each year.

The investment representative says no it will not be taxed, the growth will be deferred.  However, the CPA who has been managing the returns says the gains will lose their tax deferred status.

Can you shed any light on this matter?

Thanks for you insight.

A:

Unfortunately, there is no easy answer here.  I browsed through the annuity and trust sections of my reference books and things are different depending on what kind of annuities are involved, the details of the trust, along with the actual ownership and beneficiaries of the annuities.  Each combination of those factors changes the net tax effect.

It would be best to have both your annuity salesperson and CPA lay out their evidence for their conclusions in terms to the factors I mentioned.  I obviously don’t know either of those persons, and this may seem a bit biased; but in similar cases like this, I have found the CPA’s objective analysis of the facts to be more trustworthy than the opinion of a person who is looking at earning some very substantial commissions from the sale of annuities.  Too often, I have seen cases where annuity salespeople say anything the clients want to hear just to close a sale, without doing any actual research as to its accuracy. 

Good luck with that.

Kerry

 

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