Annuities are transferable, but almost every way of transferring one triggers taxes, contract penalties, or both. Whether you can move an annuity cleanly depends on two things: whether it was funded with pre-tax retirement money or after-tax dollars, and which of a handful of specific exceptions your situation fits. A 1035 exchange, a spousal transfer, a divorce settlement, and a death benefit are the four routes that can avoid immediate tax. Everything else generally forces the owner to recognize the accumulated gain as ordinary income.
What Determines Whether You Can Transfer It
The first question is whether the annuity is qualified or non-qualified. A qualified annuity sits inside a tax-advantaged retirement account such as an IRA or a 403(b), and it follows retirement-plan rules.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans You can move it through a trustee-to-trustee transfer or a 60-day rollover into another qualified account, but you cannot assign ownership to a third party. Try to hand it to anyone other than a spouse and the IRS treats the entire value as a taxable distribution, plus a 10% early withdrawal penalty if you’re under 59½.2Internal Revenue Service. Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs
A non-qualified annuity was bought with after-tax money outside any retirement plan. The contract is legally assignable to another person or entity. Legal and tax-free, though, are not the same thing. Reassigning ownership of a non-qualified annuity almost always forces the original owner to pay income tax on the accumulated gain.
One rule applies to both types: once the annuity has been annuitized (converted from a savings vehicle into a fixed stream of payments), transfer is generally off the table. The payments are locked in and ownership changes are no longer available.
Swapping One Annuity for Another Without Tax
If you want to move to a different annuity contract because of lower fees, better crediting rates, or new riders, Section 1035 of the tax code lets you do it without recognizing gain. You can exchange an annuity for another annuity, or for a qualified long-term care insurance contract.3Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies
The rules are strict. The owner on the new contract has to be the same person as on the old one. The annuitant, whose life expectancy governs the payments, must also stay the same. And the money has to move directly from the old insurance company to the new one. If you take personal possession of the funds at any point, the IRS treats the whole deferred gain as a taxable distribution.
Partial 1035 Exchanges
You can also exchange just part of an annuity’s value. A 180-day holding period applies to both the original and the replacement contract. Withdraw money from either within that window and the IRS may reclassify the entire transaction as a taxable distribution.4Internal Revenue Service. Revenue Procedure 2011-38 Amounts received as annuity payments over 10 years or more, or over a lifetime, do not count against the 180-day limit.
Pitfalls to Watch
If cash or any other non-annuity property comes out during the exchange, that amount is immediately taxable as ordinary income. Even canceling a contract loan during the exchange can create a taxable event.5Internal Revenue Service. Instructions for Forms 1099-R and 5498
A 1035 exchange also typically restarts the surrender charge schedule on the new contract. Surrender charges are fees the insurance company imposes for early withdrawals, often starting around 7% and declining to zero over six to eight years. Even though you avoided a tax hit, your penalty-free access to the money may be locked up again.
Giving or Selling a Non-Qualified Annuity to Another Person
Transferring a non-qualified annuity to someone else, whether as a gift or a sale, is treated by federal law as if you cashed out the gain. You owe ordinary income tax on the difference between the contract’s cash surrender value and your investment (the premiums you paid in) the moment the transfer goes through.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (e)(4)(C) The recipient takes a new cost basis equal to the cash surrender value on the transfer date, so the same gain will not be taxed twice.
The one general exception is a transfer to a spouse or a former spouse in connection with a divorce.7Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (e)(4)(C)(ii)
The mechanics are simple. You file a Change of Ownership form with the insurance company, which may also require the annuitant’s consent. Once processed, the carrier issues a Form 1099-R reporting the taxable gain. Beyond the tax hit, watch for surrender charges if you’re still inside the contract’s surrender period.
Moving an Annuity Into a Trust
Estate planning frequently involves shifting assets into trusts, but annuities and most trusts do not mix well. Under federal tax law, when a non-natural person (any entity that is not a human being, including most trusts) holds an annuity, the contract loses its tax-deferred status entirely. Earnings are taxed as ordinary income every year instead of deferring until withdrawal.8Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (u)
The practical effect is severe. Transferring a non-qualified annuity to an irrevocable non-grantor trust will likely trigger immediate taxation of the accumulated gain, and going forward, annual earnings inside the trust are taxed each year. The main reason to own an annuity in the first place disappears.
Some exceptions exist. A grantor trust, where you remain the effective owner for tax purposes, is generally treated as held by a natural person, so deferral can survive. The statute also exempts annuities acquired by a decedent’s estate, annuities held inside qualified retirement plans or IRAs, and immediate annuities that begin paying out within one year of purchase.9Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (u)(3) Trust structure matters enormously here, and getting it wrong is expensive.
Transferring an Annuity in Divorce
Divorce is the one situation where you can transfer an annuity to another person completely tax-free, whether it’s qualified or non-qualified. Federal law says no gain or loss is recognized on a transfer to a spouse, or to a former spouse if the transfer is incident to the divorce.10Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce The receiving spouse inherits the original cost basis, so the deferred gain stays deferred until they take distributions.
A transfer counts as incident to the divorce if it happens within one year after the marriage ends, or if it is related to the end of the marriage even when completed later. Treasury regulations generally treat transfers made within six years of the divorce as qualifying under the second prong if they are connected to the divorce agreement. Miss that window and the transfer falls back to the normal rules, meaning the gain becomes immediately taxable to the transferring spouse. This tax-free treatment does not apply if the receiving spouse is a nonresident alien.
Qualified Plans Require a QDRO
For qualified annuities held inside employer retirement plans, the transfer has to go through a Qualified Domestic Relations Order. A QDRO is a court order directing the plan administrator to pay a portion of the participant’s benefits to an alternate payee, typically the former spouse.11Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order Without one, the plan is legally required to pay benefits only according to its own terms, regardless of what the divorce decree says.12U.S. Department of Labor. Qualified Domestic Relations Orders Under ERISA – A Practical Guide to Dividing Retirement Benefits
Annuities held in IRAs don’t use QDROs. The IRA custodian processes the transfer based on the divorce decree or separation agreement, moving the awarded portion into an IRA in the former spouse’s name. Non-qualified annuities don’t require a QDRO either, though a court order or divorce decree documenting the transfer is still necessary to establish that it qualifies for tax-free treatment.
Passing an Annuity to Someone at Death
When an annuity owner dies, the contract passes to the named beneficiary, not through the will or probate. How quickly the beneficiary has to take distributions depends on whether the annuity is qualified or non-qualified, and whether the beneficiary is a spouse.
Surviving Spouse
A surviving spouse has the best options in either case. For a non-qualified annuity, federal law treats the surviving spouse as the new holder of the contract, meaning they can continue it, keep the tax deferral, and delay distributions indefinitely.13Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (s)(3) For a qualified annuity inside an IRA or similar account, a surviving spouse can roll it into their own IRA and treat it as their own.14Internal Revenue Service. Publication 575 – Pension and Annuity Income
Non-Spouse Beneficiaries of a Non-Qualified Annuity
Non-qualified annuities have their own distribution rules, separate from the SECURE Act framework most people have heard about. If the owner dies before the annuity starting date, the entire interest has to be distributed within five years. A beneficiary can avoid that five-year deadline by electing payments spread over their own life expectancy, but those payments must begin within one year of the owner’s death.15Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (s) If the owner dies after payments have already started, the remaining interest must be paid out at least as fast as the method already in use.
Non-Spouse Beneficiaries of a Qualified Annuity
Qualified annuities held in IRAs or employer plans follow the SECURE Act rules. Most non-spouse beneficiaries have to empty the inherited account by December 31 of the tenth year after the year of death. If the original owner had already reached their required beginning date (age 73 in 2026), the beneficiary also has to take annual minimum distributions during that ten-year window.16Internal Revenue Service. Retirement Topics – Beneficiary
A few beneficiaries can stretch distributions over their own life expectancy instead: the owner’s minor children (until they reach majority), disabled or chronically ill individuals, and anyone not more than ten years younger than the deceased owner.16Internal Revenue Service. Retirement Topics – Beneficiary
No Stepped-Up Basis, No 10% Penalty
Unlike most inherited assets, annuities do not receive a stepped-up basis at death. The gain that built up during the original owner’s lifetime is fully taxable as ordinary income when the beneficiary takes distributions. The original after-tax premiums return tax-free, but everything above that is taxed. Beneficiaries are, however, exempt from the 10% early withdrawal penalty regardless of their age.17Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions