Updated July 30, 2026. Quick answer: If an annuity contract “is held by a person who is not a natural person”, IRC §72(u)(1) provides that it “shall not be treated as an annuity contract” and that “the income on the contract … shall be treated as ordinary income received or accrued by the owner” each year. Deferral ends; the gain becomes annual income. But the paragraph closes with a carve-out, and that sentence is where the whole question lives.
The rule, then the sentence that qualifies it
§72(u)(1): “If any annuity contract is held by a person who is not a natural person— (A) such contract shall not be treated as an annuity contract for purposes of this subtitle (other than subchapter L), and (B) the income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the owner during such taxable year. For purposes of this paragraph, holding by a trust or other entity as an agent for a natural person shall not be taken into account.”
So the statute does not say a trust cannot own an annuity, and it does not say trust ownership always ends deferral. It says a non-natural holder loses annuity treatment unless the entity holds as an agent for a natural person.
| Who holds the contract | §72(u)(1) result |
|---|---|
| An individual | Not reached by §72(u)(1) at all |
| An entity, holding for its own account | Not treated as an annuity contract; income taxed annually as ordinary income |
| A trust or other entity, as an agent for a natural person | The holding “shall not be taken into account” — the rule does not apply |
What this page will not tell you, and why. Whether your particular trust holds as an agent for a natural person is the entire practical question, and it is a facts-and-terms question turning on the trust instrument. No primary text defining that test was obtained in this pass, so this site states none. Anyone who gives you a confident one-line rule for it is going beyond the statute quoted above. This is a question for a lawyer reading your actual trust document.
When it comes up. Almost always as a side effect of estate planning rather than a decision about the annuity: a revocable trust is created and assets are retitled into it wholesale, the annuity among them. The retitling is the moment §72(u) becomes live, and it is usually done by someone focused on probate avoidance rather than on subchapter-level annuity taxation. If you are moving assets into a trust and an annuity is on the list, raise this before the change of ownership, not after — and note that who counts as the holder is also what drives the forced-distribution rules.
§72(u)(2) defines the “income on the contract” that (1)(B) taxes, measured from net surrender value plus distributions received, reduced by net premiums and amounts already included in income in prior years.
The half of this decision that is not in the Code. The tax treatment below is statutory and applies to everyone. What it costs you to leave is contractual: the surrender-charge schedule and where you sit in it, any guaranteed withdrawal or income rider and what it is actually worth, and the death benefit. Those live in your contract and the annual statement, not in the law, and this site does not guess at them. Ask the issuer in writing for the current surrender value, the remaining surrender period, and the value of every rider — then the statutory side below tells you what the tax does to whatever is left.
Sources
IRC §72(u)(1), quoted verbatim, including the closing agent-for-a-natural-person sentence. Retrieved from the United States Code, July 2026.
This states what the cited authority says about a non-qualified annuity — one bought with after-tax money outside a retirement plan — unless a page says otherwise. It is not tax, legal or investment advice. An annuity held inside an IRA or a qualified plan is governed by different provisions. This site states no surrender-charge schedule and no rider value, because both are terms of your particular contract rather than rules of law.