When a Trust Owns a Deferred Annuity: The §72(u) Rule

The general rule: no deferral for a non-natural owner

The tax deferral that makes a deferred annuity attractive is not unconditional. If an annuity contract is held by a person who is not a natural person — a corporation, a partnership, or a trust — the Code says it is not treated as an annuity contract for income-tax purposes, and the income on the contract for the year is treated as ordinary income received or accrued by the owner (IRC § 72(u)(1)). In plain terms: the inside gain is taxed every year as it accrues, whether or not anything is withdrawn. The single most valuable feature of the contract is gone.

The “agent for a natural person” exception

The statute does not stop there. The flush language of § 72(u)(1) carves out a crucial exception: a contract is treated as held by a natural person if it is held by a trust or other entity as an agent for a natural person (IRC § 72(u)(1)). The idea, drawn from the provision’s legislative history, is that what matters is the beneficial owner: if the nominal owner is a trust but the beneficial owner is a living human being, the contract keeps its deferral. The statute does not define “agent for a natural person,” so the working rules come from the trust’s income-tax character and a long line of IRS private letter rulings.

Two clarifications before going further. A private letter ruling is directed to the taxpayer who requested it and may not be cited as precedent by others (IRC § 6110(k)(3)); the rulings below are useful as a consistent statement of the IRS’s reasoning, not as binding authority. And this page is about the income-tax deferral only — it does not address whether the annuity belongs in the trust for estate-planning or protection reasons, which is a separate question.

Grantor trusts preserve the deferral

The cleanest case is a grantor trust. When a trust is a grantor trust — for example a revocable living trust, where the grantor is treated as the owner of the trust’s assets for income-tax purposes under IRC §§ 671–679 — the grantor, a natural person, is the tax owner of the annuity. The IRS has treated a grantor trust’s ownership of an annuity as ownership by a natural person, preserving deferral (see, e.g., PLR 202031008; the position traces back to rulings such as PLR 9316018). Because a standard revocable living trust is a grantor trust, moving a deferred annuity into one generally does not break deferral — one of the few beneficiary-designation-style assets that can sit in a revocable trust without a § 72(u) problem.

Non-grantor trusts: every beneficiary must be a natural person

For a non-grantor trust — an irrevocable trust taxed as its own entity — the “agent for a natural person” test does the work, and the IRS applies it strictly. The consistent position in its rulings is that the trust qualifies only if all of its beneficiaries, both income and remainder, current and future, are natural persons. If every beneficiary is a living individual, the trust is treated as holding the annuity as their agent, and deferral survives.

The exception that proves the rule is a charitable beneficiary. The IRS has ruled that where a trust’s remainder beneficiary is a charity — not a natural person — the trust fails the agency test and the annuity loses its deferral (PLR 9009047). A single non-human beneficiary anywhere in the chain can be enough to break it.

The statutory exceptions

Section 72(u) also lists contracts the non-natural-person rule does not reach at all (IRC § 72(u)(3)). The rule does not apply to a contract acquired by the estate of a decedent by reason of the decedent’s death; to contracts held under qualified retirement plans, tax-sheltered annuities, and IRAs; to a contract that is a qualified funding asset for a structured settlement; to a contract purchased by an employer on the termination of a qualified plan; or to an immediate annuity. An immediate annuity, for this purpose, is one purchased with a single premium whose annuity payments begin within about a year of purchase (§ 72(u)(4)). These carve-outs matter mostly for retirement-plan and settlement contexts, not for the ordinary case of a family trust holding a deferred annuity.

The through-line: a deferred annuity is a natural fit for an individual owner and an awkward one for a trust. Sometimes the fit is fine — a revocable grantor trust, or an irrevocable trust with only human beneficiaries — and sometimes it quietly destroys the deferral. The point of this page is to make the question visible before the transfer, not after. What happens when a trust is named as an annuity’s beneficiary, rather than its owner, is a different rule set, covered on the next page.

Sources & methodology