Variable Annuity within a by-pass trust

[Guest gregoryp]

Can anyone please help me locate a code section, plr, case, or other authority that will confirm whether or not a variable annuity within a by-pass trust (unified credit trust/credit shelter trust) will still enjoy the benefits of tax deferral?

[Mary Kay Foss]

Some providers will not issue an annuity to a Bypass Trust. There are rules that apply when an annuity contract is not held by a natural person. See Question 2 in Tax Facts 1.

A revocable trust can hold an annuity as agent for the grantor but I think you have a problem with a Bypass Trust.

[Guest gregoryp]

Thanks for the reply. I agree that issues exist with a by-pass trust owning a variable annuity. Let me narrow the possibilities and see what everyone thinks. (1) First, an individual, as trustee of his own revocable living trust, purchases a variable annuity to be owned by the revocable living trust. Second, upon his death, the living trust places the variable annuity in a by-pass trust. From this point forward, would the variable annuity, now in the by-pass trust, enjoy the benefits of tax deferral or would ordinary income need to be recognized each year? What about another scenario. (2) An individual establishes a by-pass trust and funds it with cash. The by-pass trust uses this cash to purchase a variable annuity. The by-pass trust would be the annuity owner, the individual would be the annuitant, and the individual's child would be the only beneficiary. Under this structure, would the variable annuity held by the by-pass trust enjoy tax deferral? Thanks in advance for any feedback.