Can an annuity transfer mitigate tax consequences?

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Can an annuity transfer mitigate tax consequences?

Postby pochax » Wed Aug 05, 2009 3:51 pm

i was being driven home by a car service last nite from the airport and the driver mentioned something he did to save up for his kids' college expenses (529s weren't around back then, so he said): he said he put in an annuity (not sure if fixed or variable) in his name, then let them grow tax-deferred, then before they cashed in to pay for college, they transferred ownership to their child's name so that when the child uses the money (presumably little to no income) they would pay virtually no taxes. is this legal? i thought annuities could not be cashed in until the holder is >59 yrs of age (or some retirement-range years). i am wondering if i misunderstood him because this sounded too easy a way to avoid taxes.
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Postby sscritic » Wed Aug 05, 2009 4:02 pm

For a non-qualified annuity:
Tax Consequences of Ownership Changes
Types:
Addition/deletion of joint owner
Transfer to another individual or entity
Assignment
Taxation:
Earnings are subject to income tax at time of transfer
10% penalty may apply
Gift taxes may apply
Exceptions:
Transfers between spouses
Transfers incident to divorce
Transfers between an individual and his/her grantor trust

http://www.immediateannuities.com/libra ... uities.htm
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Postby Gill » Wed Aug 05, 2009 4:18 pm

I would be quite certain that the transfer to the children, if it could be transferred at all, would be a taxable event and trigger ordinary income tax on the entire account.

Edit: After reviewing the above link, I see immdiateannuities.com confirms this.
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Postby sscritic » Wed Aug 05, 2009 4:23 pm

MBMiner wrote:I would be quite certain that the transfer to the children, if it could be transferred at all, would be a taxable event and trigger ordinary income tax on the entire account.

Edit: After reviewing the above link, I see immdiateannuities.com confirms this.

The tax is due on the earnings, not the contributions of after-tax income, as I read it. The contributions might need to be reported on a gift tax return and reduce your lifetime exemption amount depending on the size of the gift.
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Re: Can an annuity transfer mitigate tax consequences?

Postby BruceM » Wed Aug 05, 2009 4:33 pm

pochax wrote:i was being driven home by a car service last nite from the airport and the driver mentioned something he did to save up for his kids' college expenses (529s weren't around back then, so he said): he said he put in an annuity (not sure if fixed or variable) in his name, then let them grow tax-deferred, then before they cashed in to pay for college, they transferred ownership to their child's name so that when the child uses the money (presumably little to no income) they would pay virtually no taxes. is this legal? i thought annuities could not be cashed in until the holder is >59 yrs of age (or some retirement-range years). i am wondering if i misunderstood him because this sounded too easy a way to avoid taxes.


Yes, common sense should suggest this approach would not be allowed. Tax deferred savings plans are generally not transferrable, except at death or as part of a QDRO (divorce decree).

This 'transfer it to your kids' strategy is usually used to sell some form of cash value life insurance, such as a VUL, where the sales line goes something like "....make annual contributions to protect your life while savings, tax free, for your children's education...", or something equally silly.

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Postby Gill » Wed Aug 05, 2009 4:42 pm

sscritic wrote:
MBMiner wrote:I would be quite certain that the transfer to the children, if it could be transferred at all, would be a taxable event and trigger ordinary income tax on the entire account.

Edit: After reviewing the above link, I see immdiateannuities.com confirms this.

The tax is due on the earnings, not the contributions of after-tax income, as I read it. The contributions might need to be reported on a gift tax return and reduce your lifetime exemption amount depending on the size of the gift.


Yes, of course. I meant a tax on the earnings in the annuity.
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Postby bluemarlin08 » Wed Aug 05, 2009 6:29 pm

Even if you could do it the kids would have to pay a penalty for withdrawals.
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