477. How is the value of a refund or period-certain guarantee determined under a variable annuity contract?Stevenrcline202015-04-28T18:12:00Z2015-04-28T18:12:00Z25913372Summit Business Media287395614Site Map/Annuities/Nonqualified/Amounts Received as an Annuity/Variable Annuities2005-01-24T00:00:00ZTaxFactsDefaultArticleSite Map/Annuities/Quick Clicks/Variable Annuity10023-00-TF1.xml23.00;#1577;#1597;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1How is the value of a refund or period-certain guarantee determined under a variable annuity contract?1278126200.000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-19T08:08:44Z477. How is the value of a refund or period-certain guarantee determined under a variable annuity contract?If a variable annuity settlement provides a refund or period-certain guarantee, then when calculating the exclusion ratio the investment in the contract must be reduced by the value of the guarantee..Treas. Reg. §1.72-7(d). The value of such a guarantee in connection with a single life annuity is determined as follows:Find the refund percentage factor in Table III or Table VII (whichever is applicable, depending on the date the investment in the contract was made, as explained in Appendix A) under the age and (if applicable) sex of the annuitant and the number of years in the guaranteed period (see Tables in Appendix A). Where the settlement provides that proceeds from a given number of units will be paid for a period-certain and life thereafter, the number of years in the guaranteed period is clear (e.g., ten, fifteen, twenty “years certain”). If the settlement specifies a guaranteed amount, however, divide this guaranteed amount by an amount determined by placing payments received during the first taxable year (to the extent that such payments reduce the guaranteed amount) on an annual basis. Thus, if monthly payments begin in August, the total amount received in the first taxable year is divided by five, then multiplied by twelve. The quotient is rounded to the nearest whole number of years, and is used in entering Table III or Table VII, as applicable. The appropriate Table III or Table VII multiple is applied to whichever is smaller: (a) the investment in the contract, or (b) the product of the payments received in the first taxable year, placed on an annual basis, multiplied by the number of years for which payment of the proceeds of a unit or units is guaranteed. The following illustration is taken from the regulations:.Treas. Reg. §1.72-7(d)(2).Example: Mr. Brown, a fifty year old male, purchases, for $25,000, a contract that provides for variable monthly payments to be paid to him for his life. The contract also provides that if he should die before receiving payments for fifteen years, payments shall continue according to the original formula to his estate or beneficiary until payments have been made for that period. Beginning with the month of September, Mr. Brown receives payments that total $450 for the first taxable year of receipt. This amount, placed on an annual basis, is $1,350 ($450 divided by 4 or $112.50; $112.50 multiplied by 12, or $1,350).If there is no post-June 1986 investment in the contract, the guaranteed amount is considered to be $20,250 ($1,350 × 15), and the multiple from Table III (for male fifty, fifteen guaranteed years), nine percent, applied to $20,250 (because this amount is less than the investment in the contract), results in a refund adjustment of $1,822.50. The latter amount, subtracted from the investment in the contract of $25,000, results in an adjusted investment in the contract of $23,177.50. If Mr. Brown dies before receiving payments for fifteen years and the remaining payments are made to Mr. Green, his beneficiary, Mr. Green shall exclude the entire amount of such payments from his gross income until the amounts so received by Mr. Green, together with the amounts received by Mr. Brown and excludable from Mr. Brown’s gross income, equal or exceed $25,000. Any excess and any payments thereafter received by Mr. Green shall be fully includable in gross income.Assume the total investment in the contract was made after June 30, 1986. The applicable multiple found in Table VII is three percent. When this is applied to the guaranteed amount of $20,250, it results in a refund adjustment of $607.50. The adjusted investment in the contract is $24,392.50 ($25,000 - $607.50).