Section 1035 Exchange

Section 1035 Exchange

The tax-exempt exchange of two annuities or life insurance policies. The annuities exchanged are not assessed capital gains or any other taxes. Section 1035 exchanges allow a policyholder to avoid taxes that would have been levied on the first annuity or policy as long as the second is of equal or greater cost. The IRS only recognizes a Section 1035 exchange as such if the annuities or policies are directly exchanged. Selling one and buying another, for example, does not count.
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The little known planning technique is called a Section 1035 exchange and it's one of the best-kept secrets in long-term care planning today," shares Jesse Slome, executive director of the American Association for Long-Term Care Insurance, a national organization that advocates for the importance of long-term care planning.
In many cases where a client is looking to replace an existing financial product with a new product, a tax-free IRC Section 1035 exchange may seem like an ideal solution--the client is able to replace the current product with a more suitable product without adverse tax consequences.
In particular, these changes have converged to create an opportunity to use an Internal Revenue Code Section 1035 exchange to address potential long-term care funding needs.
Also, if the non-qualified SPIA is part of a Section 1035 exchange from an existing deferred annuity, this will have a bearing on whether the pre-59-and-a-half penalty tax of 10 percent will apply to the taxable part of the non-qualified SPIA.
The effect of an IRC Section 1035 exchange on the grandfathered status of a policy issued prior to June 21, 1988, and thus not subject to the seven pay test of IRC Section 7702A is not entirely clear.
A section 1035 exchange may provide a higher death benefit and cash surrender values than the original policy, but even if it does improve upon the old policy, it may not be the optimal solution.
For purposes of a Section 1035 exchange, an endowment contract is considered a contract "which depends in part on the life expectancy of the insured, but which may be payable in full in a single payment during his life.
A section 1035 exchange on its own will not cause a contract to come under the new rules, but a material increase in death benefit or other material change in connection with the exchange will.
The IRS claimed it was not a Section 1035 exchange because the entir e company A annuity was not replaced by the company B annuity.
Since a number of financial and tax factors must be considered, the CPA may be in the best position to help a client make an objective determination about the appropriateness of using a section 1035 exchange to replace a policy.
Extending the protection of the section 7805(b) relief provision to an annuity contract that is received from another insurance company pursuant to a section 1035 exchange occurring subsequent to the effective date of Rev.