Annuity Tax and Planning Considerations.

The article focuses on the tax laws affecting nonqualified annuities in the U.S. Code Section 72(b)(1) essentially allows the taxpayer to recover his or her investment ratably as the annuity payments are received. The portion of each payment that is a tax-free return of investment is determined by an exclusion ratio. The exclusion ratio, in turn, is determined by dividing the investment in the contract by the total expected return. It is important that the estate planning team properly coordinate the client's annuity beneficiary provisions with the estate plan.