If you purchased a deferred variable commercial annuity contract some time ago, it is likely that despite the downturn in the market the contract is more valuable than what you paid for it. The downside of owning this asset is that any built-up gain in the contract is taxed as ordinary income and not capital gain when you sell it. This is so even if the appreciation is the result of investments in stocks that would ordinarily be treated as long-term capital gain if they were held in your regular investment portfolio. This adverse tax treatment is similar to the way withdrawals from IRAs and qualified retirement accounts are taxed as ordinary income.
When your heirs inherit your variable commercial annuity contract, they will also inherit your cost basis, again the same as with IRAs and other retirement accounts. Such property is considered income with respect to a decedent and does not enjoy the benefit of a step-up in basis as with other investment assets. This means when they sell it the gain will be taxed as ordinary income and not capital gain: 35% and not 15%. As a result, a variable annuity contract is an ideal asset to leave to our organization at your death: Both estate and income taxes are avoided.
If you are considering leaving us a variable annuity contract, you may be better off to make the gift while you are alive.
Reason: You’ll be able to deduct your cost basis in the contract and generate income-tax savings. This benefit is only available while you are still alive.