Annuities are investment contracts that offer tax-deferred growth, so you don't pay tax on the increase in value until you withdraw the money. Because of the contractual nature of annuities, they can’t change hands as readily as other assets, such as bearer bonds or corporate securities. Additionally, the preferential tax treatment necessitates certain limitations on transferring annuities.
Parties to an Annuity
Annuities are contracts involving four parties. First, one party must offer the contract. Typically insurance companies fill this role by offering the contract for sale. Second, a person must accept and own the contract. Third, the contract insures a person’s life, called the annuitant. Usually, people take out annuities on themselves and become both the owner and the annuitant. Finally, the policy names a beneficiary who should receive any amount due at the close of the policy.
Life Span of an Annuity
Annuities insure a person’s life. They fill a role complementary to life insurance, protecting against the risk that the annuitant will live too long rather than dying too soon. Because annuities are contracts tied to a specific person’s life, annuities only live as long as the annuitant does. When the annuitant dies, the insurance company must settle the annuity. Typical settlements may include transferring the annuity to another party or paying out the death benefit.
Although the owner, insuring company and beneficiary of an annuity may change, under most circumstances the annuitant may not change. One exception is at the death of a spouse, most companies allow the surviving spouse, if she is the beneficiary, to forgo the death benefit and transfer the annuity into her name as annuitant and owner. Otherwise, the policy settles and pays out to the beneficiary, who may have the opportunity to open a new annuity with the company after recognizing any untaxed gain as income. During the annuitant’s life, however, the owner may transfer the annuity to another by assigning the contract. The transferee then enjoys all the privileges of ownership.
When annuities pay out, the untaxed growth counts toward the recipient’s taxable income because annuities grow tax deferred. Forgoing the proceeds, an election only available to the surviving spouse, transfers the entire annuity to the surviving spouse without incurring tax liability. Transferring an annuity during the annuitant’s life may have tax consequences. If the annuity is gifted to someone, such as an adult child, and exceeds $13,000 in value, the initial owner may owe gift taxes at the time of the transfer.
Executing the transfer requires contacting the insurance company that holds the contract. Get in touch with a representative of the company and let them know what you want to do. The company may mail you paperwork to return, or send a field agent to walk you through the appropriate paperwork. The company should explain any relevant state laws or contract provisions that may impact your transfer.
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