Advanced Underwriting Consultants

Question of the Day – December 26th

Ask the Experts!

Here’s the question of the day.

Question:  My client is 56 and she owns a nonqualified deferred annuity (NQDA).  She wants to surrender the contract, but is worried about the 10% penalty tax on distributions.  May she transfer the annuity to her 60 year old husband, and can he avoid the penalty tax on surrender?

Answer:  Apparently yes, if the annuity carrier permits the transfer of the contract.

A change in ownership of a nonqualified annuity contract from one spouse to another is a nontaxable transfer under Code Section 1041. The age of the policy owner is used to determine whether the taxable portion of an NQDA distribution is subject to the penalty tax.  While if the wife surrendered the annuity in the example described, she would have to deal with the penalty tax, a surrender of the contract by the husband would be exempt.

There are no IRS letter rulings or other tax authorities preventing this technique, nor are they any waiting periods apparently imposed.  It is possible that the IRS, presented with these facts, might try to impose the step transaction doctrine to apply the penalty tax, but in our opinion that seems unlikely.

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