Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.
Question: I have a client who wants to but a deferred annuity contract, and then transfer it to his children. What are the tax consequences of the transfer?
Answer: If an owner buys an annuity contract and then transfers it to a non-spouse third party, there are two potential tax consequences to be worried about:
- The income tax consequence is that the donor will essentially be treated as surrendering the annuity, and will owe tax based on the then-current gain in the contract
- The gift tax consequence is that the annuity’s terminal reserve will be treated as a taxable gift from the donor to the donee
We’re not sure how terminal reserve is calculated for annuity contracts—it’s a better question to ask an actuary. We suspect that terminal reserve for a deferred annuity is usually an amount roughly equal to the contract’s gross cash value.
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