489. Can a grantor trust own an annuity contract? How is an annuity owned by a grantor trust taxed?Alexis Longrcline202015-04-28T20:12:00Z2015-04-28T20:12:00Z24702685Summit Business Media226314914489. Can a grantor trust own an annuity contract? How is an annuity owned by a grantor trust taxed? A grantor trust can own an annuity contract, but, in certain circumstances, the “non-natural person rule” of IRC Section 72(u) will cause the denial of the tax-deferral benefits to an annuity owned by a trust. If annuity tax benefits are denied under the non-natural person rule, income on the annuity for any taxable year will be treated as ordinary income received or accrued by the taxpayer for that tax year..IRC Sec. 72(u)(1). However, if a trust owns an annuity contract as the agent for a natural person, Section 72(u) does not apply..IRC Sec. 72(u)(1)(B). A revocable grantor trust will usually fall within this exception because the grantor (presumably a natural person) and the grantor trust are treated as one “person” for income tax purposes,.See IRC Sec. 671. and moreover because the property is generally held in trust specifically for that grantor. More generally, as long as the grantor trust (a non-natural person) owns the annuity contract, and the primary beneficiaries are natural persons, the annuity contract should escape the non-natural person rule of Section 72(u)..Let. Ruls. 9316018, 9120024. If significant interests in the trust are held by non-natural persons, however, it is possible that the trust will not qualify as an agent for a natural person. If the grantor trust is irrevocable, determining whether the trust is exempt from the non-natural person rule becomes more complicated because the grantor of the trust might not retain any right to the trust assets or income. In making the determination whether significant interests in the trust are held by natural or non-natural persons, it is important to determine who will receive the primary economic benefit of the trust assets..Let. Ruls. 200449011, 200449013, 200449014. The IRS has ruled privately that annuity contracts owned by an irrevocable grantor trust established by an employer-corporation (a non-natural person) were held for the benefit of natural persons (the employees) because (1) the employee-beneficiaries of the trust would receive all of the trust income and (2) the employer held no future interest in the trust assets..Let. Ruls. 9316018, 9322011. Therefore, even though the actual grantor of the trust was a non-natural person, the annuity contract was able to escape the non-natural person rule because the beneficiaries were natural persons.Note that immediate annuities are explicitly exempted from the non-natural person rule of IRC Section 72(u)..IRC Sec. 72(u)(3).PLANNING POINT: If a deferred annuity is owned by an irrevocable grantor trust and the primary annuitant is not the grantor, it is unclear whose death will trigger mandatory payout under IRC §72. §72(s)(6)(A) suggests that the primary annuitant’s death will do so, but the grantor trust rules suggest that it’s the death of the grantor that will trigger payout. As a practical matter, the policies of the issuer of the annuity contract will determine the payout, as that issuer will follow its policies. Some insurers may require payout on the death of the primary annuitant; most will do so upon the death of the trust grantor. This is not an issue where the trust is not a grantor trust see Q 490– (John L. Olsen, CLU, ChFC, AEP)