581 / What are the income tax consequences when a deferred annuity is transferred to a trust?

The gift of an annuity to the donor’s irrevocable grantor trust is more problematic. Many commentators hold that such transfer cannot be subject to tax because transfers from a taxpayer to the taxpayer’s grantor trust are not taxable events. The gift of an annuity to one’s irrevocable trust, however, may be a completed gift subject to tax. A strict reading of IRC Section 72(e)(4)(C) will lead to the conclusion that recognition of gain upon the transfer of an annuity occurs whenever such transfer is made without full and adequate consideration. A gift of an annuity to an irrevocable trust (grantor or not) arguably meets that test, especially if the transferor reports the same on a gift tax return. In other words, the Section 72(e)(4)(C) test appears to be based on gift treatment, not income tax treatment, even though it ultimately has income tax consequences. The IRS has not provided definitive guidance on this point.