Advanced Underwriting Consultants

Question of the Day – February 22

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has used his nonqualified annuity (NQDA) as security for a bank loan.  Does that create any tax problems?

Answer: Yes.  If an NQDA is used as security for a loan, the loan will be treated as a taxable distribution from the annuity.  Likewise, for a modified endowment contract (MEC) life policy, a security interest against the policy is a taxable distribution.

Here’s an excerpt from Revenue Code Section 72, which describes how loans against NQDAs are taxed.

    Loans treated as distributions
      If, during any taxable year, an individual -
        (i) receives (directly or indirectly) any amount as a loan
         under any contract to which this subsection applies, or
       (ii) assigns or pledges (or agrees to assign or pledge) any
         portion of the value of any such contract,
        such amount or portion shall be treated as received under the
        contract as an amount not received as an annuity.

“Amounts not received as an annuity” from an NQDA are taxed on a gain-first basis.

Under Code Section 72, MECs subject to an assignment are taxed the same way as NQDAs.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.