Who are the parties to an annuity
contract?
The three parties to an annuity contract are the
owner, the annuitant, and the beneficiary. In many
instances, the owner and the annuitant will be the
same.
The owner is usually the purchaser of the annuity
and has all the rights under the contract, subject
to the rights of any irrevocable beneficiary. The
owner is subject to income tax on all payments made
from the annuity, regardless of who is named as payee.
If applicable, the penalty on any premature distributions
is based on the owner's age. If the owner dies while
the contract is in the accumulation phase (discussed
later), there is a mandatory distribution of the
death benefit.
The owner may be a natural or non-natural person.
Some examples of non-natural persons are corporations,
partnerships, and trusts. Generally, annuity contracts
owned by non-natural persons are not treated as annuity
contracts for federal income tax purposes and the
earnings on such contracts are taxed annually as
ordinary income received or accrued by the owner
during the taxable year.
As with many other income taxation rules, there are several exceptions to the
non-natural owner rule.
For example, an annuity contract will be treated
as owned by a natural person if the owner is a trust
or other entity which holds the annuity as an agent
for a natural person. However, this special exception
will not apply in the case of an employer who is
the nominal owner of an annuity contract under a
nonqualified deferred compensation arrangement for
its employees. Immediate annuities are also excepted
from the non-natural owner rule.
The owner names the annuitant and the beneficiary
of the annuity contract. The annuitant must be a
natural person and serves as the measuring life for
purposes of determining the amount and duration of
any annuity payments made under the contract. The
beneficiary receives the death benefit or any remaining
annuity payments upon the death of the owner.
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