Is it possible to do a partial 1035 exchange
of a non-qualified annuity? January 2000
Question: May a client desires to transfer part of their existing
non-qualified annuity to a new deferred annuity and part to a new
immediate annuity?
Answer: The
IRS recently announced that it had accepted a tax court ruling (Conway
v. Commissioner) enabling partial 1035 exchanges of annuities.
The IRS said that
the intention of Section 1035(a)(3) provides that "no gain
or loss shall be recognized on the exchange of an annuity contract
for another annuity contract." The IRS said: "We agree
with the court that as long as all of the funds in the original
contract, less any surrender fee, remain invested in annuity contracts
after the transaction, and as long as the proceeds at all times
during the transaction remained invested in annuity contracts, the
transaction was within the parameters of section 1035."
Can an annuity be owned by a trust?
October 6, 1999
Question:
The parents have created an irrevocable trust for their son.
The purpose of the trust was to provide retirement income to the
son. The parents made a large gift to the trust. The trust invested
in an annuity. The named annuitant was the son/beneficiary. The
trust called for payments to the son from a set retirement age until
death.
Answer: Generally, an annuity owned by non-natural person
is not accorded tax-deferred treatment on earnings. However, previous
rulings, as well as this ruling (PLR 199933033) have allowed trust
to hold annuities and be accorded tax-deferred treatment on earnings
as long as the trust is holding the annuity as agent for a natural
person. The IRS noted that this was the case here and the annuity
will be accorded tax-deferred treatment on earnings. What happens
if the annuitant pre-decease's the owner? Question: If the parent
is the owner of an annuity and a child is the annuitant, what happens
if the child predeceases the parent? Answer: Under this traditional
approach, if the owner/parent dies first, the contingent owner/child
"inherits" the annuity. If the annuitant/child dies first, the annuitant's
beneficiary, in this case the owner/parent, received the policy
proceeds, pays tax on the gain and is then free to reinvest the
money.
