565 / If a grantor trust owns a deferred annuity and the grantor is not the annuitant, whose death triggers the annuity payout?

Others disagree, and argue that it is the grantor’s death that will trigger payout. This is because of the grantor trust rules, which treat the grantor of a trust and the trust itself as one individual for income tax purposes. Because the grantor is the owner of the trust assets for income tax purposes, many experts argue that the grantor should be treated as owner—or “holder”—for purposes of IRC Section 72(s). That said, this ambiguity applies only to deferred annuities owned by irrevocable grantor trusts. When the owner is a revocable trust, the grantor trust rules control (as the grantor is the “holder” for income tax purposes). Although that is also true when the trust is irrevocable and also a grantor trust, some authorities insist that the rule of IRC Section 72(s)(6)(A) controls, as the grantor of an irrevocable trust owning a deferred annuity does not have the unfettered control of that annuity contract that he would have were the trust revocable.

At this point, the matter remains unresolved without any clarity or on-point guidance from the IRS.

1. IRC § 72(s)(6)(A)..