Advanced Underwriting Consultants

Question of the Day – March 29

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.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.