11 Confusing Annuity Tax Rules Financial Advisors Should Know

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

Yes, subject to the limits on deductions for gifts to charities. This does not necessarily mean, however, that gain at the time of gift is avoided. 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. 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, because 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).