What constitutes a gift of an annuity? What constitutes a gift of a premium?
A person has made a gift of the contract if the person (1) purchases an annuity contract, the proceeds of which are payable to a beneficiary other than the person or the person’s estate, (2) retains no reversionary interest in the estate, and (3) has no power to re-vest the economic benefits in himself or herself or the estate, or to change the beneficiary.
Likewise, if a person fully transfers (absolutely assigns) a contract, or relinquishes by assignment every power the person retained in a previously issued contract, the person has made a gift. If the person pays a premium on a contract and has no ownership rights, the person has made a gift of the premium. Of course, if the person receives adequate consideration for the transfer, it is not a gift.
Can the owner of an annuity contract avoid income taxes by assigning the right to receive the payments to another individual while retaining ownership of the contract?
No. It is a basic tax principle that “fruit” is attributed to the “tree” on which it grows.
Without actually transferring the underlying contract, a gift or gratuitous assignment of just the income will not shift the taxability of the income away from the owner of the contract. This applies to income accumulated on the contract before or after the assignment.Withdrawals and annuity payments are taxable to the owner, even if paid to a third party. It would apparently follow that any liability for a premature distribution penalty would be on the policy owner, and would be based on the owner’s age, death, or disability.
Is the naming of an irrevocable beneficiary under a refund annuity a gift?
Yes. This is true even though the beneficiary will get nothing unless the annuitant dies before receiving payments equal to the annuitant’s premium cost. Because the gift is contingent on the annuitant’s death within a specified period, it is the gift of a “future interest” and therefore does not qualify for the annual exclusion. The value of the gift is the present value of the contingent right to receive any remaining refund payments upon the death of the annuitant.
When does the gift of an annuity between spouses qualify for the gift tax marital deduction?