However, the tax deferral only applies as long as the owner is alive. Once the owner dies, the annuity must begin making post-death distributions to the beneficiary. Under IRC Section 72(s), upon the death of any owner, the annuity must begin to make post-death distributions to the beneficiary.
The Tax Reform Act of 1986 changed the joint ownership of annuity taxation rules to prevent using joint ownership to avoid taxation of the annuity over two lives. This makes annuities distributable whenever either one of the owners dies. If the other spouse is named as beneficiary, the taxation would then be postponed.
Beneficiary Designation
When a surviving spouse is named the beneficiary of the non-qualified annuity, they may continue the annuity in their own name. This is very similar to a spousal IRA rollover allowing the surviving spouse to continue to receive tax-deferred growth. The ability to continue the non-qualified annuity does not turn on ownership at all but on who the beneficiary is. If one spouse is the owner but names their spouse as the beneficiary, then the spouse who is named beneficiary can continue the annuity and continue to receive tax-deferred growth in the annuity.
In next blogpost, we will discuss joint ownership issues.