The consequences can be dire. From the perspective of the investor
(the corporation or trust buying the annuity) the IRS
will be looking for payment of taxes on phantom income.
The Trust may not have liquidity to make those payments. At a
bare minimum those payments are unexpected and significantly erode the
performance of the annuity.
From the perspective of the representative involved in the sale,
the buyer may have legal recourse on a theory of fraud, misrepresentation,
suitability, or otherwise based on representations at the time of sale that the annuity
would be tax deferred, when the opposite might actually be true, or for
failure to disclose that income is not deferred. The purchase
of an annuity by a non-natural person should be a compliance red flag. The
customer should be provided a complete disclosure and should be given adequate and
correct information on the anticipated after-tax performance of the annuity.
There are a number of exceptions and complexities to tax treatment
of annuities that are not held by a natural person. A
qualified accountant or financial services lawyer should be consulted to determine – before the
annuity is in place – how the annuity will be treated by the IRS.
For more information, contact Sigmund Schutz or click here for more about Preti Flaherty's Financial Services Group.
