Can You Buy an Annuity for Someone Else: Gift Tax and Medicaid

Yes, you can buy an annuity for someone else, and insurance companies write these contracts every day. The mechanics rely on splitting the roles a single person usually fills: you become the owner who funds and controls the contract, while the person you’re buying it for becomes the annuitant whose life expectancy sets the payout and who receives the income. For 2026, you can put up to $19,000 of premium into a contract for another person without any gift tax reporting, and a $15,000,000 lifetime exemption shields most buyers from ever owing federal gift tax on larger amounts.¹² The purchase itself is simple. The tax treatment, the surrender restrictions, and the way the contract behaves when someone dies are where third-party annuities catch buyers off guard.

The Three Roles You Have to Separate

A standard annuity has one person filling every role. In a third-party arrangement, those roles split, and each one behaves differently.

The owner purchases the contract and controls it. That’s you. You decide on withdrawals, name beneficiaries, and make any changes the contract allows.
The annuitant is the person whose age and life expectancy the insurance company uses to calculate payment amounts and duration. The annuitant typically receives the periodic payments once the contract starts paying out.³
The beneficiary receives any remaining value or death benefit when the annuitant or owner dies, depending on the contract.

These roles can overlap in various combinations. You might be the owner and beneficiary while your parent serves as annuitant. Or you might own the contract with your child as both annuitant and beneficiary. Each slot on the application drives a different part of the contract’s behavior, so the insurance company needs every role clearly designated.

Whose Death Ends the Contract

This is the trap that surprises buyers who are older than the person they’re helping. In an owner-driven contract, the death benefit triggers when the owner dies, even if the annuitant is still alive. In an annuitant-driven contract, it triggers when the annuitant dies. Most contracts sold today are owner-driven. So if you buy an annuity for your adult child and you die first, the contract can terminate and pay the death benefit to the beneficiary, disrupting the income stream you intended to create.

Federal tax law reinforces this. When a non-annuitant owner dies before the annuity starting date, the entire value of the contract generally must be distributed within five years of the owner’s death.⁴ A designated beneficiary can elect to take payments over their own life expectancy if they begin within one year, and a surviving spouse who is the designated beneficiary can step into the owner’s position. Before you sign, ask the carrier whether the contract is owner-driven or annuitant-driven, because your death could otherwise force an accelerated and fully taxable payout on the person you were trying to protect.

What You Need to Apply

Carriers require detailed information on every party. You’ll need the legal name, date of birth, Social Security number, and current address for both the owner and the annuitant, plus identifying information for any named beneficiaries. The annuitant’s date of birth drives the life expectancy calculation that sets the payout rate, so it’s the number the insurer cares about most.

You’ll document where the premium is coming from: a personal bank account, a wire transfer, or a rollover from another product. Most states require the annuitant to have an insurable interest relationship with the owner, which in practice means a close family connection or financial dependency. A parent buying for a child, a spouse for a spouse, or a grandparent for a grandchild satisfies this everywhere.

The annuitant has to sign the application. Carriers will not issue a policy without the annuitant’s knowledge and consent, because the contract is based on that person’s life. Expect to provide government-issued photo ID for both the owner and the annuitant. Incomplete applications are the most common cause of processing delays.

How the Purchase Actually Completes

The application goes to the insurance company through an agent’s electronic portal or by mail to the carrier’s home office. The initial premium accompanies the application or follows immediately, with larger amounts usually wired. The carrier reviews the application, performs a suitability check, and issues the formal contract by mail or secure download.

That delivery starts the free look period, a window of at least 10 days during which you can cancel the contract and receive a full refund of the premium.⁵ Many states extend it to 20 or 30 days for senior citizens, replacement policies, or mail-order sales. Read every page during this window. After it expires, the contract becomes binding, the payment schedule begins according to the policy terms, and you’ll typically get an online portal to track value, payments, and beneficiary designations.

Surrender Charges Are Where Buyer’s Remorse Hits

Annuity contracts impose surrender charges if money comes out during the first several years, and the penalties can be steep. A common schedule starts at 6 or 7 percent of the withdrawal in the first year and drops one percentage point each year until it reaches zero, usually after six to eight years. Some contracts run the surrender period out to 10 years.

Most contracts allow the annuitant to withdraw up to 10 percent of the account value each year without triggering the charge. Beyond that, the penalty applies to the excess. If the person you bought the annuity for hits an unexpected expense, the surrender charge can take a real bite out of the withdrawal. Ask for the full surrender schedule in writing before you buy, and make sure the recipient knows they’re trading liquidity for guaranteed income. An annuity works best as a gift when the recipient genuinely doesn’t need immediate access to the principal.

Gift Tax Rules When You Fund the Premium

The IRS treats the premium you pay on an annuity where someone else receives the benefit as a gift. For 2026, you can give up to $19,000 per recipient without any gift tax reporting.¹ If you’re married, your spouse can join in the gift, effectively doubling the exclusion to $38,000 for that recipient in a single year. The annual exclusion applies per recipient, so multiple family members each get a separate $19,000 threshold.⁶

If the premium exceeds the annual exclusion, you file IRS Form 709 by April 15 of the year after the gift.⁷ Filing doesn’t mean you owe tax. It reduces your lifetime gift and estate tax exemption, which for 2026 is $15,000,000.² Unless your total lifetime gifts and estate exceed that figure, you won’t owe federal gift tax. But you still have to file Form 709 for any year in which gifts to a single recipient cross the annual exclusion, even when nothing is due.

Skipping a Generation

If you buy an annuity for a grandchild or anyone more than one generation below you, a separate tax may apply on top of the gift tax rules. The generation-skipping transfer tax is imposed at the maximum federal estate tax rate, currently 40 percent, on transfers that skip a generation.⁸ You get a separate generation-skipping exemption that matches the $15,000,000 basic exclusion for 2026.⁹ Most families never come near it, but if you’re making large gifts across several grandchildren alongside other estate planning, keep a running total, because the 40 percent rate stacks on top of any gift tax already due.

How the Recipient Gets Taxed on Payments

The person receiving annuity payments doesn’t get the money entirely tax-free. Each payment splits into two pieces: a tax-free return of the original premium and a taxable portion representing earnings. The split is set by the exclusion ratio, which divides the total investment in the contract by the expected return over the annuitant’s lifetime.⁴

If the original premium was $100,000 and the expected total payout over the annuitant’s lifetime is $200,000, the exclusion ratio is 50 percent. Half of each payment is tax-free, and the other half is ordinary income. Once the recipient has recovered the full original investment through those tax-free portions, every subsequent payment becomes fully taxable.¹⁰ The insurance company calculates the ratio and reports both portions on Form 1099-R each year. Make sure the recipient knows this going in, because a big annuity payment can produce a surprise tax bill if they were expecting a pure gift.

No Step-Up in Basis at Death

Annuities don’t receive the step-up in cost basis that most inherited assets get. When the owner or annuitant dies and a beneficiary receives the remaining value, the built-up gains are treated as income in respect of a decedent. The beneficiary owes ordinary income tax on every dollar above the original investment.¹¹ A lump-sum payout puts the entire gain onto the beneficiary’s return in one year. That’s one of the biggest disadvantages of using an annuity as a wealth transfer tool compared to stocks or real estate.

Trust Ownership Loses the Tax Deferral

If you’re thinking about having a trust buy the annuity, the rules change dramatically. Under federal law, an annuity held by a non-natural person, meaning a trust, corporation, or other entity, loses its tax-deferred status. The annual growth inside the contract is taxed as ordinary income to the trust each year, even if no withdrawals are made.⁴

Two exceptions matter. If the trust holds the annuity as an agent for a natural person, deferral is preserved; a revocable living trust where you’re both grantor and beneficiary typically qualifies, but an irrevocable trust with independent trustees may not. And an immediate annuity, one purchased with a single premium that starts paying within one year in substantially equal installments, is exempt regardless of who owns it. Get a tax opinion on the specific trust structure before funding.

Medicaid Look-Back Can Undo the Gift

Buying an annuity for a family member can create serious problems if you or the recipient later needs Medicaid for long-term care. Medicaid’s five-year look-back treats the premium you paid as a gift, and any gifts made within five years of a Medicaid application produce a penalty period during which the applicant is ineligible. The penalty is calculated by dividing the gift amount by a state-specific divisor tied to the average monthly cost of nursing home care.

Medicaid-compliant annuities do exist, but they must be irrevocable, non-assignable, actuarially sound based on the owner’s life expectancy, paid in equal monthly installments, and name the state as remainder beneficiary.¹² A standard annuity bought as a gift for someone else will almost certainly not meet these requirements. If either of you might need Medicaid within the next five years, get legal advice before funding the contract.

1
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
2
Office of the Law Revision Counsel. 26 US Code 2010 – Unified Credit Against Estate Tax
3
Annuities.PacificLife.com. Understanding Annuities
4
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Investor.gov. Free Look Period
6
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
7
Internal Revenue Service. Instructions for Form 709
8
Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
9
Internal Revenue Service. Whats New – Estate and Gift Tax
10
Internal Revenue Service. Publication 939 – General Rule for Pensions and Annuities
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Internal Revenue Service. Publication 575 – Pension and Annuity Income
12
CMS. The Deficit Reduction Act – Important Facts for State and Local Government Officials