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1035 Exchanges |
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1035 refers to a provision in the tax code which allows for the direct
transfer of accumulated funds in a life insurance policy, endowment policy,
annuity policy to another life insurance policy, endowment policy or annuity contract
without creating a taxable event.
Title 26, Subtitle A, Chapter 1, Sub chapter O, Part III, Section 1035 A endowment for another endowment with a maturity no later than the maturity date of the endowment being replaced. An annuity policy for than of another annuity policy. Non Taxable Transfers Robert purchased a life insurance policy 20 years ago with a death benefit of $100,000, the premium was $1,000 a year and has a cash surrender value of $75,000. Robert is now retiring and has adequate life insurance provided by another life insurance policy. Robert doesn't need any income at this time but has decided to purchase an annuity paying a guaranteed rate of interest at 6.0%. Robert doesn't want to "cash in" in his life insurance since there would be a "gain" which would be taxed. The value of the policy is $75,000 the premiums paid total $20,000 and if Robert "cash in" his policy the gain of $45,000 would be subject to taxation. The solution is to "cash in" his life insurance policy by executing a "1035 Exchange". Robert would fill out a 1035 Exchange form which would direct the life insurance company to "cash in" his policy and send the $45,000 directly to the company which is issuing his annuity policy. In this way there would be no taxes due, further the "cost basis" of $20,000 would become the "cost basis" of his annuity contract. 1035 exchange are used with annuity or variable annuity contracts in the same way to transfer the funds of one annuity to that of an annuity paying a higher rate of interest. It is suggested that before you do this, check an see if there would be any penalties or surrender charges imposed before you "cash in" an annuity contract. |
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Reference Tax Code Section 1035 |