Client receiving father's annuity as a gift

Technical topics regarding tax preparation.
#21
Dennis2  
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A transfer for no consideration will not cause income recognition. Donee gets donor's basis. Simply ask the company to effect transfer and be kind enough to provide fmv of gift.
 

#22
Dennis2  
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Do note that the heading for §72(e) is "Amounts not received as annuities"
 

#23
Nilodop  
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I did note that, but it's a heading only and is not the text of the particular subsection. 72(e)(4)(C).

I don't recall the specific source and don't have time to check but I wii, but I think I saw that the fact that the individual, once he takes the annuity to make the gift, has immediate access to the CSV, kind of a constructive receipt approach. I'll look for it later.
 

#24
Dennis2  
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The concept that intent to gift (or sell or abandon) somehow entitles donee to rights he didn't have before the decision was made seems really silly...♫
 

#25
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Does you source feel that income recognition occurs even if the guy changes his mind?
 

#26
Anderly  
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From RIA Checkpoint:

J-5061. Transfers of annuity contracts without adequate consideration as amounts “not received as an annuity.”
An annuity contract that is transferred before the annuity starting date, for less than full and adequate consideration, is treated as a distribution under the contract as an amount that is “not received as an annuity.”

An individual transferor is considered to receive a nonannuity payment equal to: the excess (at the time of transfer) of:

(1) the contract's cash value, over
(2) his investment in the contract. 11
This deemed distribution is taxable under the rules applicable to amounts not received as an annuity, so that it is includible to the extent allocable to income on the contract, see ¶ J-5053.

The transferee's investment in the contract is increased by any amount that the transferor thus includes as a result of the transfer (see ¶ J-5300 et seq.). 12

The treatment of a transfer without adequate consideration, i.e., as a distribution not received as an annuity, doesn't apply where the contract is transferred to a spouse or to a former spouse as part of a divorce. 13

A trust's distribution of annuity contracts to the beneficiaries was not treated as an assignment of an annuity contract without full and adequate consideration under Code Sec. 72(e)(4)(C)(i) (footnote 11), where (1) upon the trust's final distribution, each beneficiary would be distributed the contract for which that beneficiary was the annuitant; (2) the distribution was anticipated to occur before the contract's annuity starting date; and (3) the trust would not receive any consideration from any beneficiary in exchange for the contracts. The legislative history of Code Sec. 72(e)(4)(C)(i) indicated that it related to inhibiting taxpayers from avoiding Code Sec. 72(s)'s required distribution rules (¶ J-5014) by continuing tax deferral beyond a life of an individual taxpayer. Here, the transfer of the contracts from the trust to the beneficiaries did not have the effect of avoiding Code Sec. 72(s). 13.1

IRS privately ruled that the transfer of an annuity contract from a trust to its beneficiary was not treated as an assignment of an annuity contract without full and adequate consideration, because the trust was not an individual. It didn't matter that the beneficiary was treated as having held the annuity for tax purposes under Code Sec. 72(u)(1), with the trust treated only as the nominal owner (see ¶ J-5005). 13.2

11Code Sec. 72(e)(4)(C)(i).
12Code Sec. 72(e)(4)(C)(iii).
13Code Sec. 72(e)(4)(C)(ii).
13.1IRS Letter Ruling 201124008.
13.2IRS Letter Ruling 9204010; IRS Letter Ruling 9204014; IRS Letter Ruling 199905015.
 

#27
Dennis2  
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An annuity contract that is transferred before the annuity starting date, for less than full and adequate consideration, is treated as a distribution under the contract as an amount that is “not received as an annuity.”



In general annuities used for medicaid planning are in distribution at time of transfer
 

#28
Nilodop  
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That "fact" is absent from OP.
 

#29
Dennis2  
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if we have the type of annuity that does not begin distribution until maturity transfer would indeed fall under the heading of §72(e)
 

#30
Nilodop  
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Tending to support Dennis2 is 1.72-10
(b) In the case of a transfer of such a contract (ed. - a contract to which section 72 applies) without valuable consideration, the annuity starting date and the expected return under the contract shall be determined as though no such transfer had taken place. See paragraph (b) of § 1.72-4. The transferee shall include the aggregate of premiums or other consideration paid or deemed to have been paid by his transferor in the aggregate of premiums or other consideration as though paid by him. In determining the transferee's investment in the contract, the transferee's aggregate amount of premiums or other consideration paid (as so found) shall be reduced by all amounts either received or deemed to have been received by himself or his transferor before the annuity starting date, or before the date on which an amount is first received as an annuity, whichever is the later, to the extent that such amounts were excludable from the gross income of the actual recipient under the applicable income tax law at the time of receipt. For treatment of amounts received subsequent to both the above dates by such transferee, but not received as annuity payments, see § 1.72-11.


But confusingly to me, and maybe inconsistent, is this from above
See paragraph (b) of § 1.72-4
, because 1.72-4(b) doesn't seem to cover an annuity received w/o consideration.

And I'm not clear that 1.72-11 covers "without consideration".

This article http://static.fmgsuite.com/media/docume ... d7320e.pdf has the "feel" of being researched and written by knowledgeable lawyers from MetLife or an affiliate. In Sec VI, they seem to say what I said. This one also agrees. https://www.uwyo.edu/uwe/passiton/passi ... uities.pdf
 

#31
Dennis2  
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The more i think about this the more convinced I am that I am wrong. Basic principle calls for recognition on assignment of income. There should be no way around this.
 

#32
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The annuity value is only $25k, so the income tax can't be large.
You wrote $10k/day, which strikes me as a typo.
The problem is how to dissipate rapidly and still qualify. I'd ask the elder attorney if the discount planning we typically do for estate tax savings will work in the Medicaid arena.
Steve
 

#33
mariaku  
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Thank you to everyone who helped me understand the annuity consequences. I can't ever express how I appreciate this group!!

One bit of info re: MeciCal qualifications & lookback rule I was told (I myself know nothing about it, but am sharing it in case it can help someone in the future):

"The look back period in CA is 30 months.

There is a funny rule where Medi-Cal will look at one gift at a time and do a calculation where they divide the amount of the individual gift by approx 10K to calculate the number of months of penalty (months you have to wait before you qualify). So, if you gave someone a 40K gift in Sept, divide 40K by 10K and you get 4 months of penalty. But you can give that 40K gift to as many people as you want as well as give the same gift amount every day in September and Medi-Cal will only do that calculation once for some reason. This is how to accelerate eligibility. The lawyer documents all the gifts, and submits it all in the application process. This is the general gist. "

Maria U. Ku, CPA
Oakland, CA
 

#34
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Great tip.

None of us would straighten out a bureaucrat in this situation, even though what they are doing is clearly inconsistent with the intent of the law. Martinets don't thrive in the real world.

This type of planning to qualify for Medicaid strikes me as more offensive than planning to lower taxes. Tax planning is a defense against the taking of property against the owner's will. Medicaid planning is designed to get someone else's money. I'm not saying I won't do it. I'm just say'n...
Steve
 

#35
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This is my first experience with chatting. I quickly got addicted and went overboard. The negative reactions have caused me to apologize and stop chatting. I'll be happy to respond to a private message.
Steve
 

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