Advanced Underwriting Consultants

Question of the Day – May 23

Ask the Experts!

Here’s the question of the day.

Question: One of my client couples currently have a joint revocable trust that owns an annuity contract.   The husband is named as the annuitant.  They want to know if they can do a tax-free exchange of the contract for a trust-owned annuity with the wife as the annuitant.

Answer: Yes, it appears so, if the companies involved will cooperate.

Here are the separate theoretical steps to accomplish the goal:

  1. Change the annuitant on the existing contract from husband to wife.  That “transfer” between spouses should be income tax-free under IRS rules.
  2. Do a Section 1035 exchange from the existing contract to the new one, following normal Section 1035 procedures.

It is also possible to try exchanging the unchanged existing contract for the new one that names the wife the annuitant.  We believe that the IRS would treat the whole transaction as tax-free.  However, you may get adverse 1099 reporting from the existing carrier, as well as potential push-back from the receiving carrier on accepting the transaction as a Section 1035 exchange.  Check with them before you proceed.

If you find out that there will be adverse 1099 reporting of the transaction, the clients and their tax advisor may still be comfortable with taking a position contrary to what will be reported on Form 1099.

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.