Can a Partnership Own a Fixed Annuity?
As a separate entity for legal purposes, a partnership business can buy and own a fixed annuity contract. However, business ownership of an annuity does not come with the same tax benefits allowed when a "natural" person buys this type of contract. Before buying an annuity contract, the partnership should make sure the purchase fits the intended goals after reviewing the alternate tax consequences.
A partnership business is a separate legal entity apart from the individual partners. For the purchase of an annuity, the company would fall under the rules governing ownership of the annuity by a "non-natural" owner. With the partnership ownership of a fixed annuity, the contract loses the tax-deferred accumulation of earnings that an annuity owned by an individual enjoys. Thus, the interest earnings must be reported each year as taxable income to the IRS.
With the partnership business structure, all income -- and deductions -- pass through to the partners to claim on their individual tax returns. This means if the business buys an annuity, the interest the annuity earns will pass through to the partners as taxable income. If the goal of buying an annuity is to earn tax-deferred interest, partnership ownership of the contract defeats that purpose. It would be better for taxes if the annuity were owned by one of the partners, or separate annuities were purchased and each owned by an individual partner.
There are three parties named on an annuity contract. An annuity will have an owner, the annuitant and a beneficiary. The annuitant must be a real "natural" person whose age is used to determine payment details if the annuity is annuitized -- converted to a stream of payments. With a partnership as the owner, the partners would need to name an individual as the annuitant. The beneficiary receives the value of the annuity if the owner or annuitant passes away. With a partnership-owned annuity, the partnership could be named as the beneficiary, so if the annuitant dies, the company retains the value of the annuity.
The tax issues can become complicated with a non-natural annuity owner and differently named annuitant and beneficiary. Before buying an annuity through the partnership, get your company's tax adviser involved and ask the insurance agent marketing the annuity to get an opinion letter from the insurance company's legal department concerning the tax implications. Problems with the income tax status of the contract could negate the purpose of buying an annuity with the partnership as the owner.