497. When is the exchange of one annuity contract for another a nontaxable exchange?Stevenrcline212012-09-06T16:34:00Z2015-04-28T20:17:00Z2015-04-28T20:17:00Z35303021Summit Business Media257354414Site Map/Annuities/Nonqualified/Disposition/Policy Exchanges1035 exchange Q30 302005-01-24T00:00:00ZTaxFactsDefaultArticleEthics and 1035 Exchanges.pdfSite Map/Annuities/Quick Clicks/1035 ExchangeEthics and 1035 Exchanges.pdf10030-00-TF1.xml30.00;#1589;#1592;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1Does tax liability arise when a policyholder exchanges one annuity contract for another?
1285123600.000000000TaxFactsDefaultArticleSBMEDIA\cjump2010-06-04T10:54:51Z497. When is the exchange of one annuity contract for another a nontaxable exchange?The IRC provides that the following exchanges are nontaxable: (1)the exchange of a life insurance policy for another life insurance policy, for an endowment or annuity contract, or for a qualified long-term care insurance contract; (2)the exchange of an endowment contract for an annuity contract, for an endowment contract under which payments will begin no later than payments would have begun under the contract exchanged, or for a qualified long-term care insurance contract; (3)the exchange of an annuity contract for another annuity contract; and(4)the exchange of a long-term care insurance contract for another qualified long-term care insurance contract..IRC Sec. 1035(a). These rules do not apply to any exchange having the effect of transferring property to any non-United States person..IRC Sec. 1035(c).As a result of the Pension Protection Act of 2006, for exchanges after 2009, life, annuity, endowment, and qualified long-term care insurance contracts may now be exchanged for qualified long-term care insurance contracts..IRC Sec. 1035(a). In addition, the presence of a qualified long-term care insurance contract as a rider on an annuity or life insurance policy does not cause it to fail to qualify for the purposes of such exchanges. In other words, a taxpayer can exchange an annuity without a long-term care insurance contract rider for an annuity with such a rider, and still qualify for nonrecognition treatment..IRC Sec. 1035(b)(2), IRC Sec. 105(b)(3). If an annuity is exchanged for another annuity, the contracts must be payable to the same person or persons. Otherwise, the exchange does not qualify as a tax-free exchange under IRC Section 1035(a)..Treas. Reg. §1.1035-1. The IRC defines an annuity for this purpose as a contract with an insurance company that may be payable during the life of the annuitant only in installments..IRC Sec. 1035(b)(2). Despite the singular reference in IRC Section 1035(a)(3) to “an annuity contract for an annuity contract,” the IRS concluded that one annuity could properly be exchanged under IRC Section 1035 for two annuities, issued by either the same or a different insurance company..Let. Rul. 199937042.Further, the exchange of two life insurance policies for a single annuity contract also has been considered a proper IRC Section 1035 exchange..Let. Rul. 9708016. The exchange of one annuity for a second annuity with a term life insurance rider attached was afforded income tax-free treatment under IRC Section 1035..Let. Rul. 200022003. A proper IRC Section 1035 exchange also occurred where an annuity holder directly transferred a portion of the funds in one annuity to a second newly-issued annuity..Conway v. Comm., 111 TC 350 (1998), acq. 1999-2 CB xvi. An assignment of an annuity contract for consolidation with a pre-existing annuity contract is a tax-free exchange under Section 1035, even though the two annuities were issued by different insurance companies..Rev. Rul. 2002-75, 2002-2 CB 812.The exchange of a life insurance policy, endowment contract, or fixed annuity contract for a variable annuity contract with the same company or a different company qualifies as a tax-free exchange under IRC Section 1035(a)..Rev. Rul. 72-358, 1972-2 CB 473. Planning Point: Although the exchange of a variable annuity for a fixed annuity is not specifically addressed in this ruling, there does not appear to be any evidence that would prohibit such an exchange from qualifying for IRC Section 1035 treatment, and in practice insurance companies routinely allow this treatment. Additionally, the exchange of an annuity contract issued by a domestic insurer for an annuity contract issued by a foreign insurer was considered a permissible IRC Section 1035 exchange..Let. Rul. 9319024.