Ask the expert: What about taxes on annuity exchanges?

The Code defines an annuity for this purpose as a contract with an insurance company that may be payable during the life of the annuity 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 service 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 has also been considered a proper IRC section 1035 exchange. [Let. Rul. 9708016]

The exchange of one annuity for a second annuity with 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 transferred directly 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. [Let. Rul. 2002-75, 2002-2 CB 812]

For more discussion, see the resource.

Source: This is an excerpt from Tax Facts on Insurance and Employee Benefits, 2009 Ed., published in 2009 by The National Underwriter Company, Cincinnati, Ohio. See pp. 29-30. Learn about Tax Facts here