597 / May a charitable contribution deduction be taken for the gift of a maturing annuity or endowment contract?

If a policyholder gives an annuity contract that was issued after April 22, 1987, whether in the year it matures or in a year prior to maturity, the policyholder is treated as if he or she received, at that time, the excess of the cash surrender value at the time of the transfer over the policyholder’s investment in the contract.¹ Thus, the policyholder must recognize gain on the contract in the year of the gift. Given that gain is recognized, though, the policyholder’s charitable deduction is equal to the full fair market value of the annuity, due to the fact that any embedded gain was recognized at the time of transfer (as otherwise the charitable gift rules limit the deductibility of ordinary income property with embedded gains).²

Where an endowment contract (or annuity contract) issued before April 23, 1987, is contributed before the year the contract matures, Revenue Ruling 69-102 requires that the donor include in his or her income, in the year the contract is surrendered by the donee (or matures), the excess of the cash surrender value at the time of the gift over the donor’s basis. Because gain is not recognized at the time of gift, though, the IRC limits the donor’s charitable deduction to the donor’s cost basis.³ (The ruling concerned a gift in the year immediately before the contract matured but may not be limited to that year.)

For a gift to a charity in connection with purchase of an annuity from the charitable organization, see Q 607.