519 / Is an individual who transfers an annuity contract without adequate consideration treated as receiving amounts “as an annuity”?
An individual who transfers any annuity contract issued after April 22, 1987, for less than full and adequate consideration will be treated as having received an “amount not received as an annuity” unless the transfer is between spouses or incident to a divorce under the IRC Section 1041 non-recognition rule ( Q 106). The amount the transferor will be deemed to have received is the excess of the cash surrender value of the contract at the time of the transfer over the investment in the contract at that time. The transferee’s investment in the contract will be increased by the amount, if any, included in income by the transferor ( Q 580).1
Planning Point:
This provision effectively prevents annuity owners from transferring their gain to another individual through gifting the annuity contract, because the gains embedded in the contract become taxable to the transferor at the time of transfer.
1
. IRC § 72(e)(4)(C).
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