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Taxes for a Variable Annuity Gift

A question was recently asked to CNN Money about the taxes that will be paid to gift a variable annuity to one’s children.  Anne C. Lee of Money Magazine cleared up the confusion regarding variable annuity gifting.  There are two important things to look into.  First of all, the annuity owner will not owe gift taxes on a variable annuity gifted to their children unless the current annuity value is greater than an individual lifetime gift-tax exclusion.  This amount is currently $5 million, so most people will be safe avoiding those specific gift taxes.

There is, however, another way that you can be hit hard with taxes when you want to gift a variable annuity.  In the CNN Money question, the inquirer mentions that they have had significant gains on their variable annuity.  In this case, all of the annuity gains are subject to income taxes as with any investment gain.  Taking the entire annuity out at once to gift to one’s children might not be such a good idea because of the potentially hefty income taxes.  One option would be to make your children beneficiaries of your death benefits, and they would pay the taxes on their portion after the investor’s death.  If you wanted to give them the money now, you could take the money out of your variable annuity in small withdrawals to spread out the tax burden, then gift the cash to your children.

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