I recently spoke with Larry Greenberg, president of Jefferson National in Louisville, Kentucky. Among other topics, we discussed advanced planning strategies for wealth transfers by holding variable annuities (VAs), specifically investment-only VAs (IOVAs), in trusts. It’s an intriguing but complex topic, and in this post I’ll cover the arrangement’s basic features.
How can a trust own a VA?
Your first reaction to the idea of a trust holding a VA is that the strategy will backfire and eliminate the annuity’s tax-deferral benefits. That’s a logical conclusion based on Internal Revenue Code Section 72(u), which covers cases in which a person who is not a “natural person” holds an annuity. If that section applies, the VA will not be treated as an annuity contract and the income earned will be considered ordinary income received or accrued by the owner during that taxable year. Tax rates on trusts’ retained income are high, so that would be an expensive outcome for clients looking to accumulate funds in the trust.