High net worth investors and their advisors often find themselves with legacy life and annuity policies acquired years earlier that no longer meet their current financial needs. Be it rising costs or outdated features, these assets may weigh down portfolios and investment returns significantly. Luckily, under Section 1035 of the IRS tax code they may qualify for tax-free exchange into something better suited to meet both life insurance and retirement needs.
While 1035 exchanges provide many advantages, certain requirements must be fulfilled in order to avoid taxes or penalties. Furthermore, it’s vitally important that one be informed as to the market availability of annuities that would meet your goals before considering an exchange. Blueprint Income has assisted clients in gathering the necessary data so they may evaluate if a 1035 exchange into a different annuity contract is the most viable solution.
One of the key requirements of a 1035 exchange is for its policy or annuity owner to remain the same; to take advantage of tax-free treatment under 1035, original contracts must be transferred directly from one person to another within the new contract and vice versa. It’s also crucial that similar products are replaced – it would not be legal to transfer an annuity between companies for 1035 purposes as this would constitute a taxable withdrawal that could lead to significant tax liabilities.
For example, if the existing annuity or life insurance policy was purchased using loans from financial institutions, repayment will need to take place first before engaging in an exchange under 1035. Furthermore, any replacement policy or annuity must match up exactly with its predecessor in terms of both its terms and investment options if it is to qualify as a like-kind replacement under Section 1035.
Another key consideration when making the decision to exchange is your existing annuity or life insurance contract’s surrender charges. Most insurers provide a period in which you can withdraw the remaining value without incurring additional fees on top of what was already imposed by its original contract.
While it may be tempting to withdraw the remaining value from an expiring contract or have it automatically renew, many prefer using a 1035 exchange to replace it with an annuity that offers more attractive rates, lower costs or better guarantees. Our Blueprint Income team can guide you through this process and collect all necessary data so as to find one which best meets your objectives – also helping navigate insurer business processes to ensure a swift exchange process.