To set up an annuity for a child, an adult buys the contract from an insurance company and holds it for the child under either a custodial arrangement or a trust, because minors cannot sign binding contracts. From there, the work breaks into four pieces: choosing the annuity type, choosing the legal ownership structure, clearing the insurer’s application and suitability review, and understanding the tax and penalty rules that will govern the money for decades.
Choose the Annuity Type First
Three types are commonly available, and the right one depends on how much risk you want the child’s money to carry over a very long horizon.
- A fixed annuity pays a set interest rate for a defined period and then resets. It carries the lowest risk and usually has the lowest minimum premium, often starting around $5,000.
- A variable annuity puts the money in investment subaccounts similar to mutual funds. Returns follow the markets, minimum premiums tend to be higher, and the growth potential over a long accumulation period is greater.
- A fixed indexed annuity ties returns to a market index like the S&P 500 but includes a floor against losses, trading some upside for downside protection.
A child’s annuity is unusual in that the accumulation period can run 40 years or more before the child reaches age 59½. That length of runway is the main reason people weigh the higher growth potential of variable or indexed products against the guaranteed but modest returns of a fixed contract. The insurance representative walks through the fit during the suitability review described below.
Decide How the Annuity Will Be Legally Held
Because a child cannot own the contract directly, you need a legal framework for holding it. There are two common options.
UGMA or UTMA Custodial Account
The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act allow an adult to serve as custodian of assets that legally belong to the child.1Social Security Administration. SI 01120.205 Uniform Transfers to Minors Act The custodian handles investment decisions and paperwork with the insurance company until the child reaches the transfer age set by state law. On that date, control passes to the child automatically.
The transfer age varies more than most people expect. Some states set it at 18, others at 21, and a handful allow custodianship to continue to age 25 or older. Check your state’s version of the UTMA before opening the account, because once the child hits that age, you lose all authority over the funds regardless of whether you think the child is ready to manage them.
Trust
A trust gives you much more control over when and how the child receives the money. You can restrict distributions to certain purposes such as education or a home purchase, stagger payouts across several ages, or name a professional trustee. The trade-off is complexity: an attorney has to draft the document, and the trust may need its own tax identification number.
If you want contributions to the trust to qualify for the annual gift tax exclusion, the trust must include withdrawal rights, sometimes called Crummey powers, that give the beneficiary a temporary window to pull out each year’s contribution. Without them, the IRS treats the gift as a future interest that does not qualify for the exclusion.
Keep Contributions Inside the Gift Tax Exclusion
Money you put into an annuity for a child counts as a gift for federal tax purposes. Under the annual exclusion, you can give up to $19,000 per recipient in 2026 without filing a gift tax return or using any of your lifetime exemption.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can combine exclusions and give up to $38,000 per child per year.
To use the exclusion, the gift has to be a present interest, meaning the recipient has an immediate right to use or benefit from it.3Office of the Law Revision Counsel. 26 USC 2503 Taxable Gifts Contributions to a UGMA or UTMA custodial account generally qualify because the child owns the assets outright. Contributions to a trust qualify only if the Crummey withdrawal rights are in place. Stay within the exclusion and you will not owe gift tax or need to file IRS Form 709.
Complete the Application and Suitability Review
The application asks for identifying information on both the child and the adult who will own the contract. For the child, you need full legal name, date of birth, and Social Security number. The adult provides government-issued identification such as a driver’s license or passport, and documents the source of the funds. Because the minor cannot enter a contract, the adult signs everything.
Insurance companies and their representatives are required to evaluate whether the annuity is appropriate for your situation before completing the sale. The suitability review looks at the adult purchaser’s age, income, and net worth; investment objectives; time horizon; risk tolerance; liquidity needs; and tax status. Answer these questions carefully, since errors slow the insurer’s review.
Naming a Beneficiary
The application also asks who receives the annuity’s value if the annuitant dies before distributions begin. Insurance companies generally cannot pay proceeds directly to a minor. To keep the money out of court, name a custodian on the beneficiary designation using language that references your state’s UTMA, for example, “Jane Doe as custodian for the benefit of John Smith under the [state] UTMA.” Without this designation, a court may need to appoint a guardian to receive the funds.
Submit, Fund, and Use the Free-Look Period
Once the paperwork is complete, you submit the application to the insurer, often through a secure online portal, though some carriers still require original signatures by mail. You fund the contract with an initial premium at submission, typically by wire or check. Minimum premiums on fixed annuities usually start around $5,000 to $10,000; variable annuities often require more. The insurer holds the funds while it verifies identities and completes its compliance review, then issues the contract.
After you receive the contract, you have a free-look period to review the terms and cancel for a full refund. Under the model regulation from the National Association of Insurance Commissioners, that window is at least 15 days, and your state may allow longer.4National Association of Insurance Commissioners. Annuity Disclosure Model Regulation Use it to confirm the interest rate or investment options, the fee schedule, the surrender charge timeline, and the payout provisions match what the representative described.
Know the Tax Rules Before the Money Goes In
Earnings inside an annuity grow tax-deferred; you owe nothing on them until money comes out.5Internal Revenue Service. Publication 575 Pension and Annuity Income Over decades, that deferral can compound into a meaningful advantage.
When money is eventually withdrawn from a non-qualified annuity (which is what a child’s annuity purchased with after-tax dollars is), the IRS applies an earnings-first rule. Each dollar out is treated as taxable earnings until all the gains have been distributed; only after that do withdrawals draw on your original contributions, which come out tax-free.6Office of the Law Revision Counsel. 26 USC 72 Annuities Certain Proceeds of Endowment and Life Insurance Contracts Early withdrawals are therefore almost entirely taxable.
Kiddie Tax on Distributions Taken Young
Annuity income is unearned income. If a child takes distributions while still subject to the kiddie tax, unearned income above $2,700 (for 2026) is taxed at the parent’s rate rather than the child’s.7Internal Revenue Service. Revenue Procedure 2025-32 The kiddie tax applies to children under 18, 18-year-olds who do not earn more than half their own support, and full-time students under 24 who do not earn more than half their own support.8Internal Revenue Service. Topic No. 553 Tax on a Childs Investment and Other Unearned Income If the annuity is left alone to grow, none of this applies, because no taxable income is generated until distributions begin.
Understand the Two Layers of Early-Withdrawal Cost
Annuities are built for the long term, and two separate penalties discourage early access.
The first is the insurance company’s surrender charge. Most contracts allow you to withdraw a small percentage of the account value each year (often 10%) without penalty, but larger withdrawals during the early years trigger a charge. A common schedule starts at around 7% in the first year and drops by one percentage point annually until it reaches zero, typically after seven or eight years. The exact schedule sits in the contract.
The second is a federal 10% additional tax on the taxable portion of any distribution taken from a non-qualified annuity before the account holder turns 59½. It sits on top of the regular income tax owed on the earnings. For a child’s annuity, this is the rule that shapes everything: an annuity opened for a newborn will not clear the penalty window for nearly six decades. A few narrow exceptions apply, including distributions after the holder’s death, distributions due to total and permanent disability, and a series of substantially equal periodic payments spread over the holder’s life expectancy.6Office of the Law Revision Counsel. 26 USC 72 Annuities Certain Proceeds of Endowment and Life Insurance Contracts Outside those exceptions, any withdrawal before 59½ triggers the penalty. That makes an annuity a poor fit if the child may need the funds for college or a first home; other savings vehicles handle those goals better.
How the Annuity Affects College Financial Aid
On the FAFSA, annuities are excluded from the net worth calculation and are not reported as assets.9Federal Student Aid. Current Net Worth of Investments Including Real Estate Money held in a UGMA or UTMA brokerage or savings account, by contrast, is reported as the student’s asset and reduces federal aid eligibility more aggressively than parent-owned assets. Many private colleges, though, use the CSS Profile, which counts a non-qualified annuity as a parent asset and can still reduce aid at those schools. Factor both forms in if aid planning matters.
What Happens When the Child Becomes an Adult
If the annuity sits inside a UTMA custodial arrangement, the child gains full control at the state’s transfer age.1Social Security Administration. SI 01120.205 Uniform Transfers to Minors Act That age is commonly 21 but ranges from 18 to 25 or older depending on the state. The custodian notifies the insurer, submits a change-of-ownership form and proof of the child’s age, and the custodian’s role ends. The new owner can keep the contract growing, take withdrawals subject to the tax and penalty rules above, or convert the contract into a stream of annuity payments.
If the annuity is held in a trust, the trust document keeps controlling the timing of payouts, and the trustee (not the young adult) decides when distributions happen. That is the main reason people choose a trust in the first place: it is a way to hold the money past the age at which a UTMA would hand it over.