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Annuity Tax Traps

Gifting an annuity is a taxable event.  The simple act of changing the owner on your annuity to your son causes the annuity interest to be immediately taxable.  That’s true even if you give the annuity to a charity (you pay tax on the interest and you have a deduction for the entire value of the annuity).

Holding a fixed annuity past the original term (past the expiration of the surrender charges when funds can be withdrawn without penalty) could cost you.  There appears to be an assumption on the part of some annuity companies that if you continue to hold an annuity past the original term, you are probably the type of investor that does not read their statements or seek to earn the best return.  So often, they pay an un-competitive rate on your money and are happy to have you as a customer.  Meanwhile, they are offering much higher rates to attract new customers.  If you have an annuity past the term, find out where you can get a better rate (don’t forget to compare the other new and old annuity features and company rating).

Holding a variable annuity past the original term could cost you.  Variable annuities provide a death benefit equal to your original premium or your current annuity value (many annuities have a death benefit which automatically locks in market gains on the anniversary of the contract over varying time periods such as annually, every five years, etc).  Let’s hypothetically say you bough at annuity for $100,000 that’s now $200,000 in value and the term has ended.  Let’s say keep this annuity and let’s say the stock market falls precipitously and your sub-accounts decline to $80,000 and you die. Your beneficiaries get $100,000.  However, had you exchanged your annuity to a new annuity at the end of the term when the value was $200,000, you “step up” your death benefit to $200,000.  Your heirs would receive $200,000 upon your death in the above scenario, even though your annuity value had declined to $80,000. (By switching to another annuity, another surrender charge period may be imposed).

This is not meant to be an article to fully explain annuities.  There are many other considerations including costs, expenses and several other important features.  This is to warn you about common mistakes we see.  There are many others. 

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