Tax Facts
586 / Can the purchase of a private annuity result in a taxable gift?
There is no gift if the purchase of an annuity is a bona fide ordinary business transaction.1
Where closely related parties are involved, however, a gift is made to the promisor of the amount by which the fair market value of the property exchanged for the annuity exceeds the present value of the annuity.2 Likewise, a gift can be deemed made to the purchaser of the amount by which the present value of the annuity exceeds the fair market value of the property transferred. There will be no gift even in an intra-family transaction, however, if substantially equal values are exchanged and there is no donative intent found.3
Before May 1, 2009, the present value of the annuity generally was determined by use of the current estate and gift tax valuation tables ( Q 921).4 After May 1, 2009, the present value is determined under Section 7520’s actuarial factors.5
1. Rev. Rul. 69-74, 1969-1 CB 43, Treas. Reg. §§ 25.2511-1(g)(1), 25.2512-8.
2. Rev. Rul. 69-74, supra; Estate of Bell v. Commissioner, 60 TC 469 (1973); Fehrs v. U.S., 79-2 USTC ¶ 13,324 (Ct. Cl. 1979); La Fargue v. Commissioner, 800 F.2d 936 (9th Cir. 1986).
3. Ellis Sarasota Bank & Trust Co. v. U.S., 77-2 USTC ¶ 13,204 (M.D. Fla. 1977). See also Rev. Rul. 76-491, 1976-2 CB 301.
4. Notice 89-60, 1989-1 CB 700; Treas. Reg. §§ 20.2031-1, 25.2512-1; Estate of Cullison v. Commissioner, 221 F.3d 1347, 2000-1 USTC ¶ 60,376 (9th Cir. 2000).
5. Treas. Reg. § 25.2512-5(d).
Where closely related parties are involved, however, a gift is made to the promisor of the amount by which the fair market value of the property exchanged for the annuity exceeds the present value of the annuity.2 Likewise, a gift can be deemed made to the purchaser of the amount by which the present value of the annuity exceeds the fair market value of the property transferred. There will be no gift even in an intra-family transaction, however, if substantially equal values are exchanged and there is no donative intent found.3
Before May 1, 2009, the present value of the annuity generally was determined by use of the current estate and gift tax valuation tables ( Q 921).4 After May 1, 2009, the present value is determined under Section 7520’s actuarial factors.5
1. Rev. Rul. 69-74, 1969-1 CB 43, Treas. Reg. §§ 25.2511-1(g)(1), 25.2512-8.
2. Rev. Rul. 69-74, supra; Estate of Bell v. Commissioner, 60 TC 469 (1973); Fehrs v. U.S., 79-2 USTC ¶ 13,324 (Ct. Cl. 1979); La Fargue v. Commissioner, 800 F.2d 936 (9th Cir. 1986).
3. Ellis Sarasota Bank & Trust Co. v. U.S., 77-2 USTC ¶ 13,204 (M.D. Fla. 1977). See also Rev. Rul. 76-491, 1976-2 CB 301.
4. Notice 89-60, 1989-1 CB 700; Treas. Reg. §§ 20.2031-1, 25.2512-1; Estate of Cullison v. Commissioner, 221 F.3d 1347, 2000-1 USTC ¶ 60,376 (9th Cir. 2000).
5. Treas. Reg. § 25.2512-5(d).
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