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Linked Benefit Products Offer Great Section 1035 Exchange Options

Posted by BSMG on 6 Jul 2017

IRC Section 1035 provides that exchanges into life insurance or annuity contracts with Long Term Care (LTC) riders will be income tax free because these riders are treated as  LTC contracts under IRC Section 7702B(e). These Section 1035 tax free exchange provisions positively impact so-called linked benefit life insurance-LTC products and linked benefit annuity-LTC products.

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Read More: 5 Guidelines for a Successful Section 1035 Exchange

These products fall into 2 major categories which provide flexibility for case design:

  1. Single deposit or flex-pay life insurance products with an LTC rider. Life insurance death benefits are income tax free.  Lifetime LTC rider benefits paid on these contracts are also income tax free (IRC Section 7702B(e)), but will reduce the net life insurance death benefit to a minimum residual amount.
  • Single deposit non-qualified deferred annuity products with LTC rider. Lifetime cash withdrawals from the deferred annuity will still be treated as LIFO income on gain in excess of cost basis. Death benefits will still be treated as taxable LIFO income in respect of decedent (IRD) on gain in excess of cost basis. However, lifetime LTC rider benefits will be income tax free (IRC Section 7702B(e)). The full deferred annuity account value will first be reduced to zero to pay LTC benefit claims before the remaining tax free LTC rider benefit claims are paid.

Find out the key Section 1035 exchange provisions that make these opportunities possible!

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Download the 2017 Tax Reference Guide

Topics: Long Term Care, Advanced Sales, Linked Benefits, 1035 Exchanges

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