What Are Gift Tax Issues With Annuities?

A direct gift to a spouse of an annuity contract in which no one else has an interest qualifies for the gift tax marital deduction. The interest of a donee spouse in a joint and survivor annuity in which only the donor and donee spouses have a right to receive payments during such spouses’ joint lifetimes is treated as a “qualifying income interest for life” for which the marital deduction is available unless the donor spouse irrevocably elects otherwise within the time allowed for filing a gift tax return.

To the extent provided in the IRS regulations, an annuity interest is treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified). If, however, an election is made to not have the donee spouse’s interest treated as a “qualifying income interest for life,” the marital deduction is not allowed if the donor gives an interest in the contract to a third party, or keeps an interest for himself, and there is a possibility that the donor or the third party could receive some benefits from this interest after the donee’s interest ends.

Thus, if the donee spouse’s interest is not treated as a “qualifying income interest for life,” the gift of a refund annuity will not qualify if the refund is payable to the donor or a third party in the event of the donee’s death during the refund period.

Although the gift tax marital deduction is not allowed for a non-US citizen spouse, an annual exclusion may be allowed instead of the marital deduction.For calendar year 2017, the exclusion amount is increased to $149,000 (up from $148,000 in 2016). However, this rule does not apply for gifts of future interests of property, which includes transfers resulting from joint and survivor annuities.

What is the gift tax value of an annuity contract or of a donee’s interest in a joint and survivor annuity?

Where an annuity is purchased by a donor on his or her own life and immediately given to another, or when an annuity is purchased by one person for another on the latter’s life, the value of the gift is the premium paid for the contract. If a person purchases an annuity and gives the contract to another person at a later date after the annuity starting date (i.e., once annuity payments have begun), the gift tax value is the single premium the company would charge for an annuity providing payments of the same amount on the life of a person who is the annuitant’s age at the time of the gift. The value of a deferred premium-paying annuity is the terminal reserve, adjusted to the date of the gift, plus the unearned portion of the last premium payment.

Where a donor purchases a joint and survivor annuity for the benefit of the donor and another, the gift tax value is the cost of the annuity less the cost of a single life annuity for the donor.

Example. A donor purchases from a life insurance company for $15,198 a joint and survivor annuity contract that provides for the payment of $60 a month to the donor during the donor’s lifetime, and then to the donor’s sibling for such time as the sibling may survive the donor. The premium that would have been charged by the company for an annuity of $60 monthly payable during the life of the donor alone is $10,690. The value of the gift is $4,508 ($15,198 less $10,690).