Yes, buying an annuity for someone else is allowed and fairly common in family gifting and estate planning. An annuity contract has three separate roles — owner, annuitant, and beneficiary — and those roles can be filled by three different people. That flexibility is what makes the arrangement useful, and it is also what creates tax, reporting, and Medicaid consequences that a single-person annuity never raises. Before you sign, work through each role and each consequence deliberately.
The Three Roles in an Annuity Contract
Every annuity assigns three roles, and knowing who fills each one is the starting point.
- The owner buys the contract, funds it, and controls it. The owner can surrender the policy, change beneficiaries, take withdrawals, or transfer ownership.
- The annuitant is the person whose age and life expectancy the insurer uses to calculate payout amounts and timing. The annuitant does not automatically have any right to withdraw money or change the contract.
- The beneficiary receives whatever value remains if the owner or annuitant dies before the funds are exhausted.
In a standard single-person annuity, one individual fills all three roles. When you buy for someone else, you are usually the owner and you name a child, grandchild, or spouse as the annuitant, the beneficiary, or both. The owner can also name a separate payee — the person who actually receives the income checks — even if that person is not the annuitant.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Unlike life insurance, annuities generally do not require the owner to have an insurable interest in the annuitant. Courts have distinguished annuities from life insurance because the anti-wagering concerns behind insurable-interest rules apply mainly to death-benefit products. Individual carriers may still ask about the relationship during underwriting, and some states have their own rules.
Gift Tax When You Fund an Annuity for Another Person
Buying an annuity and transferring ownership to another person is a gift for federal tax purposes. Whether you owe any tax depends on the value and how it interacts with the annual and lifetime exclusions.
For 2026, you can give up to $19,000 per recipient per year without triggering gift tax or any reporting requirement. Gifts above that amount reduce your lifetime exemption, which is $15,000,000 for 2026.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 You won’t actually owe gift tax until you’ve used up that full lifetime amount, but you must file IRS Form 709 for any year in which your gifts to a single person exceed $19,000.3Internal Revenue Service. Gifts and Inheritances
A critical wrinkle applies to deferred annuities. The annual exclusion only covers gifts of a “present interest,” meaning the recipient has an immediate right to use or enjoy the property. A deferred annuity that won’t begin paying for years may be classified as a future interest, which does not qualify for the annual exclusion at all. The full premium could count against your lifetime exemption even if it is under $19,000.4Internal Revenue Service. Instructions for Form 709
If you buy the annuity but keep yourself as the owner while naming someone else as the annuitant, the gift may not be complete until you actually transfer ownership or begin directing payments to the other person. Retaining control, including the right to surrender the contract or change beneficiaries, can mean you have not yet made a taxable gift. The gift-tax analysis shifts depending on when you give up those ownership rights, so this is worth working through with a tax advisor before you fund the contract.
How the Recipient’s Payments Are Taxed
Each annuity payment is split into two pieces for tax purposes: a tax-free return of the money originally invested and a taxable earnings portion. The IRS uses an “exclusion ratio” to determine the split, calculated by dividing the investment in the contract by the total expected return over the payout period.5eCFR. 26 CFR 1.72-4 – Exclusion Ratio Once the recipient has recovered the full investment, every dollar of every subsequent payment becomes fully taxable.
The funding source changes the math. A “qualified” annuity is funded with pre-tax retirement money, so there is little or no after-tax cost basis, and nearly every dollar of every payment is taxable as ordinary income. A “non-qualified” annuity is funded with after-tax dollars, which gives you a higher cost basis and shelters a larger share of each payment. If the owner takes a withdrawal from a non-qualified annuity before the payout phase begins, the IRS treats that withdrawal as coming from earnings first, making it fully taxable until earnings are exhausted.6Internal Revenue Service. Publication 575, Pension and Annuity Income
If the owner takes money out of a non-qualified annuity before reaching age 59½, the taxable portion is subject to a 10 percent additional federal tax on top of regular income tax.7Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: 10-Percent Additional Tax for Early Distributions The penalty applies to the owner’s age, not the annuitant’s. That is worth remembering when you are the older person buying for a younger relative but keeping ownership in your name.
What Happens if the Owner or Annuitant Dies First
When the owner and annuitant are different people, sequence matters. Federal tax law requires every non-qualified annuity contract to include distribution rules tied to the death of the holder, typically the owner. If the owner dies before the annuity start date, the entire remaining interest must be distributed within five years. If the owner dies after payments have begun, the remaining interest must be paid out at least as quickly as it was being distributed at the time of death.8Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: Required Distributions Where Holder Dies Before Entire Interest Is Distributed A surviving spouse named as the designated beneficiary can step into the owner’s position and continue the contract instead of taking the accelerated payout.
Insurers write these contracts as either “owner-driven” or “annuitant-driven,” which determines what happens when the annuitant dies first. In an owner-driven contract, if the annuitant dies, the owner can typically name a new annuitant and keep the contract going. In an annuitant-driven contract, the death of the annuitant triggers the death benefit and the payout to the beneficiary. Confirm which structure the carrier uses before you buy, because it directly affects how long the contract can survive the people involved.
Medicaid Look-Back and Long-Term Care Risk
Buying an annuity for a family member who may eventually need Medicaid-funded long-term care requires extra caution. When someone applies for Medicaid coverage of nursing-home or long-term care costs, the state reviews all asset transfers made during the 60 months before the application, known as the look-back period.9Centers for Medicare and Medicaid Services. Transfer of Assets in the Medicaid Program
Under the Deficit Reduction Act, an annuity purchased by or on behalf of a Medicaid applicant is treated as a transfer of assets for less than fair market value unless it meets specific requirements. When treated as a transfer, the full purchase price is used to calculate a penalty period during which Medicaid will not pay for long-term care. A “Medicaid-compliant” annuity generally must be irrevocable, non-transferable, actuarially sound, and must name the state Medicaid agency as a remainder beneficiary after any spouse or minor or disabled child. These rules vary by state, and getting them wrong can leave a family member without coverage at the worst possible time.
Owning the Annuity Through a Trust or Business
If a corporation, trust, or other non-natural person owns the annuity, the contract generally loses its tax-deferred status. Instead of accumulating earnings tax-free until withdrawal, the income accruing inside the contract each year is treated as ordinary income to the entity that owns it.10Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: Treatment of Annuity Contracts Not Held by Natural Persons
Several exceptions preserve tax deferral. The most common is the “agent for a natural person” rule: if a trust holds the annuity as agent for an individual, the contract keeps its annuity treatment. Other exceptions cover annuities acquired by a decedent’s estate, annuities held under qualified retirement plans, and immediate annuities that begin payments within one year of purchase. If you plan to hold the annuity inside a trust for someone else’s benefit, confirm the trust qualifies for one of these exceptions before funding it.
Information the Carrier Will Need
You need personal information for every person involved in the contract: the owner, the annuitant, and each beneficiary. At a minimum, the carrier requires each person’s full legal name, date of birth, current physical address, and Social Security number or Taxpayer Identification Number. Insurers collect this data to satisfy federal customer-identification requirements.11Federal Deposit Insurance Corporation. FFIEC BSA/AML Examination Manual – Customer Identification Program Dates of birth matter especially, because they set the mortality assumptions the insurer uses to price the annuity.
If you are moving money from an existing life insurance policy or another annuity, you can avoid a taxable event by using a 1035 exchange, which transfers the cost basis and accumulated value directly to the new contract. No gain or loss is recognized on the exchange of one annuity for another, or of a life insurance policy for an annuity.12Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies Cashing out the old contract and buying a new one separately, instead of doing a direct 1035 exchange, makes the gains in the old contract taxable in the year of surrender.
Make sure the application correctly identifies the ownership type (individual, joint, or trust) so it matches the account or entity funding the contract. A mismatch between the ownership designation and the funding source can delay processing or create unintended tax consequences.
The Suitability Review
Before a carrier approves the sale, the insurance agent or company must determine that the annuity is suitable for the people involved. Nearly all states have adopted a best-interest standard for annuity sales based on a model regulation from the National Association of Insurance Commissioners.13National Association of Insurance Commissioners. Annuity Suitability and Best Interest Standard Under that standard, the agent collects detailed information about the consumer’s financial profile before making a recommendation:
- Age and income of the buyer and annuitant.
- Financial situation, including existing debts, other insurance, current investments, and net worth.
- Liquidity needs, meaning how much cash the owner needs to keep readily accessible outside the annuity.
- Risk tolerance, especially whether the owner is comfortable with variable returns or needs guaranteed payments.
- Intended use and time horizon, including whether the annuity is meant for retirement income, a gift, or estate planning, and how many years before the funds will be needed.
The carrier uses this information to decide whether the product matches the buyer’s needs.14National Association of Insurance Commissioners. Suitability in Annuity Transactions Model Regulation The review typically takes several business days. Complex cases, such as trust ownership, large premiums, or transfers from multiple accounts, can take longer.
Free-Look Period and Surrender Charges
After the carrier processes the premium and issues the formal contract, the owner enters a free-look period, a window during which you can cancel for any reason and receive a refund of the initial premium. For variable annuities, this period is at least 10 days, though the exact length varies by state and may be longer for replacement contracts. The refund amount may be adjusted up or down to reflect investment performance during that window.15U.S. Securities and Exchange Commission. Variable Annuities – Free Look Period
Once the free-look period ends, taking money out before the surrender period expires usually triggers a surrender charge. These charges commonly start around 7 percent in the first year and decline by roughly one percentage point each year, reaching zero after about five to seven years. Many contracts allow the owner to withdraw up to 10 percent of the account value each year without a surrender charge. If you are buying for someone who may need access to the money sooner, walk them through the surrender schedule before the contract is issued so the restrictions are not a surprise later.