595 / What does the term “designated beneficiary” mean in the context of an inherited deferred annuity? Can the designated beneficiary be a trust?

The term designated beneficiary means an individual – a human being. Where the beneficiary is not a human being, the Section 72(s)(2) and (s)(3) exceptions to the five-year payout rule probably are not available. If a trust, for example, is named as beneficiary of a deferred annuity, and the annuity owner (or primary annuitant, as deemed owner, if the trust owns the annuity) dies, the trust probably will be unable to take distributions other than in a lump sum or within five years (see Q 594). This is because most insurers take the position that a trust, as a non-natural person, is not an individual, cannot be a designated beneficiary, and, therefore, is ineligible for the life expectancy exception of Section 72(s)(2) (and for the spousal continuation exception of Section 72(s)(3), because trusts, not being human beings, cannot marry).

Some insurers will permit a trustee of a trust named as beneficiary to elect the life expectancy option of Section 72(s)(2) over a period not extending beyond the lifetime of the oldest trust beneficiary. This is probably because they take the position that Congress intended, in enacting Section 72(s), to provide parity between the rules governing death distributions from IRAs and qualified plans and the rules governing death distributions from nonqualified annuities. Although the legislative history of Section 72(s) offers much support for this view, it should be noted that there is no specific authority for it in the IRC or regulations for annuities, as there is under IRC Section 401(a)(9) and the associated Section 1.401(a)(9) regulations with respect to see-through trust treatment for beneficiaries of retirement accounts.

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