1035 Exchange

The term 1035 exchange refers to a provision in the tax code that allows for the transfer of one annuity contract to a different annuity contract, without triggering a taxable event. Section 1035 refers to the specific provision of the Internal Revenue Code. Life insurance contracts may also be transferred under a 1035 exchange, and a life insurance contract may be transferred to an annuity contract. The exchange may involve the same insurer or two different insurers. The type of annuity is irrelevant under a 1035 exchange. In other words, a fixed annuity may be transferred to a variable annuity and vice versa. That said, the owner of each of the contracts must be the same. A 1035 exchange only applies to the account value of an annuity contract, not the guaranteed benefit values or the death benefit values of the contract. Partial exchanges are acceptable as long as the partial funds are transferred directly into the new contract. Contract owners may not directly receive funds from the original contract—this would be considered constructive receipt and would trigger a taxable event for the contract owner. Instead, funds must flow directly from the previous contract to the new contract and carrier.

Annuity Sales Down 17% in Third Quarter to $181.6 Billion

Sales of individual annuities in the United States decreased for the third straight quarter. Total individual annuity sales for the first nine months of 2009 were $181.6 billion. Fixed annuity sales continued to decline at a rate of 19% compared to the same period the previous year. Variable annuity sales were hurt by a significant downturn in Section 1035 exchanges as carriers have been scaling-back on product features while increasing prices. Source: Wall Street Journal Full Story
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Tax Free Exchange of Annuities for Long-Term Care Policies Allowed Starting in 2010

The Pension Protection Act of 2006 created tax incentives for the creation of hybrid long-term care insurance policies. The Act also provides the basis for a tax free exchange of a life insurance or annuity contract for a long-term care policy. The exchange would be conducted through a Section 1035 exchange . Consumers and their financial advisors will be able to conduct such exchanges beginning in 2010. The details are complicated, but there is a good, in-depth article referenced below that...
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Annuity Taxes and Section 1035 Exchanges

There is a great article in Smart Money that discusses the tax implications of annuity ownership. The article also provides solid detail on swapping an existing annuity on a tax free basis through a Section 1035 exchange . A good reference for tax and Section 1035 questions. Source: Smart Money Full Story

NAPFA Provides Consumers with Quality Control while Maintaining Flexibility for Financial Advisors

NAPFA is the National Association of Personal Financial Advisors.

NAPFA membership consists of financial advisors who provide comprehensive...