IRC Section 72(e)(4)(C) provides that if an individual who holds a non-qualified annuity contract transfers it without full and adequate consideration, such individual shall be taxed on an amount equal to the excess of the cash surrender value of such contract.
An exception to this recognition rule exists for the transfer of an annuity to a spouse. The distribution of an annuity contract from a nongrantor trust to a trust beneficiary normally would not trigger the above recognition of gain provision because a trust "is not an individual for purposes of section 72(e)(4)(C)." However, the distribution of an annuity contract from a grantor trust to a nongrantor, nonspousal beneficiary should trigger the above recognition provision.
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