Can Annuities Be Transferred? How and When to Do It

Annuities are contracts with an insurance company, designed to offer a steady income stream, often during retirement. They also provide tax-deferred growth, meaning earnings are not taxed until withdrawals begin. While annuities are generally intended for long-term financial planning, various circumstances can lead an owner to consider transferring the contract. This article explores the ways an annuity can be transferred, detailing the processes and tax implications.

Understanding Annuity Transfers

Annuity transfers encompass several distinct actions. A transfer can refer to a change in the legal ownership of the annuity contract, where the individual or entity holding the rights and control over the annuity changes.

Another form of transfer involves altering the designated beneficiaries of the annuity. Beneficiaries receive benefits from the annuity upon the annuitant’s death, updating who will inherit any remaining value or payout streams.

A third type of transfer is an exchange to a new annuity, often referred to as a 1035 exchange. This process allows funds from one annuity contract to be moved to another, typically with a different insurance company or a new product from the same company. Such an exchange aims to maintain the tax-deferred status of the funds while potentially securing more favorable terms or features.

Changing Annuity Ownership

Changing the legal ownership of an annuity contract involves a formal process with specific requirements and tax considerations. Common reasons for an ownership change include gifting the annuity, selling the annuity for value, transferring it as part of a divorce settlement, or as part of broader estate planning strategies.

To initiate an ownership change, the current owner must contact the issuing insurance company to obtain the necessary forms, such as a “Change of Ownership Request Form.” These forms require detailed information for both the current and new owners, including full names, addresses, and taxpayer identification numbers. Signatures on these forms often require witnessing and notarization. Once completed, the forms and any required supporting documentation are submitted directly to the insurance company.

The tax implications of changing annuity ownership depend on the nature of the transfer. If an annuity is gifted, and its value exceeds the annual gift tax exclusion limit, it could trigger gift tax considerations for the donor. Gifting an annuity generally triggers income tax recognition for the donor on any accumulated gain within the contract at the time of the transfer. If the annuity is sold or assigned for value, any gain realized by the original owner may be taxable as ordinary income. However, if an annuity is transferred between spouses or former spouses as part of a divorce or separation agreement, it qualifies as a non-taxable transfer under Internal Revenue Code Section 1041.

Changing Annuity Beneficiaries

Modifying the designated beneficiaries of an annuity contract is a straightforward process, primarily driven by life events or changes in estate planning goals. Reasons for such changes often include marriage, divorce, the birth of a child, or the death of a previously named beneficiary. Unlike ownership changes or exchanges, changing beneficiaries typically has no immediate income or gift tax implications during the annuitant’s lifetime.

To change beneficiaries, the annuity owner must obtain a “Beneficiary Designation Form” from the insurance company. This form requires the full legal name, relationship, Social Security number, and date of birth for each new primary and contingent beneficiary. The owner must also specify the percentage of benefits each beneficiary will receive. Once completed and signed, the form is submitted to the insurance company, and the change is generally effective only when the insurance company records and acknowledges the request.

While there are no immediate tax consequences for changing beneficiaries, beneficiaries will face income tax on any gains within the annuity when they receive distributions after the annuitant’s death. These distributions are taxed as ordinary income. Annuity contracts do not receive a step-up in basis at death, so beneficiaries are responsible for taxes on all accumulated growth.

Tax-Deferred Annuity Exchanges

A tax-deferred annuity exchange, commonly known as a 1035 exchange, is a specific provision under Internal Revenue Code Section 1035 that allows for the transfer of funds from one annuity contract to another without triggering immediate taxation of any accumulated gains. This provision provides flexibility for annuity owners to move their investments to contracts that better meet their current financial objectives, including securing better interest rates, lower fees, or enhanced features.

For an exchange to qualify as a valid 1035 exchange, certain requirements must be met. The transfer must be a “direct transfer” between insurance companies, meaning the annuity owner cannot receive the funds directly. The annuitant must remain the same for both the old and new annuity contracts. Permitted exchanges under Section 1035 include an annuity exchanged for another annuity, or a life insurance policy exchanged for an annuity, but generally not an annuity exchanged for a life insurance policy.

The process for a 1035 exchange is initiated by the new insurance company. The annuity owner will complete a “1035 Exchange Form” provided by the new insurer, along with a new application for the replacement annuity. This form will request details about the existing annuity contract, such as the policy number, current insurance company, and approximate value. Once the forms are submitted to the new insurance company, they coordinate the transfer directly with the old provider. A properly executed 1035 exchange defers taxation of gains. However, receiving cash during the exchange or failing to meet the “same annuitant” rule can cause the transfer to become a taxable event, with gains taxed as ordinary income and a potential 10% early withdrawal penalty if the owner is under age 59½.

Important Considerations for Annuity Transfers

Before proceeding with any annuity transfer, several financial and contractual factors warrant careful evaluation to ensure the decision aligns with an individual’s financial strategy. One consideration is the potential for surrender charges. Annuity contracts often impose these fees if funds are withdrawn or transferred before a specified surrender period, which can range from six to ten years. These charges can be substantial, sometimes starting as high as 7-8% of the contract value in the first year and gradually decreasing over the surrender period.

When considering an exchange to a new annuity, it is crucial to thoroughly review the terms, fees, and features of the new contract. This includes understanding new surrender charge schedules, administrative fees, annual charges, or costs associated with riders. The suitability of the transfer is also a factor, as regulatory guidelines, such as FINRA Rule 2330, require financial professionals to ensure that any recommended annuity transaction aligns with the individual’s financial goals, risk tolerance, and time horizon.

Consulting with a qualified financial advisor and a tax professional is highly recommended before making any transfer decisions. These professionals can provide personalized guidance, assess potential surrender charges, analyze the tax implications, and help determine if a transfer genuinely benefits the individual’s long-term financial objectives. Their expertise can help navigate the complexities and avoid unintended financial consequences associated with annuity transfers.