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Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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I inherited an annuity from my mother, she passed away several

Customer Question

I inherited an annuity from my mother, she passed away several months ago. I now want to do a 1035 exchange to a new company that pays a much higher rate for a five year immediate annuity. Do I need to have a Notice of Assignment sent to the old company to the new one or can I take a lump sum distribution from the old company and purchase a new annuity and show this on 1099 R as a 1035 exchange. I do not want to pay tax on the entire amount in a single year.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
Hello JJKane,

A 1035 exchange is related to real property exchanges of investment property, such as selling one apartment building in exchange for another apartment building. It does not apply to investments such as stocks, bonds or annuities.

The situation you are describing would be classified as a rollover.

There are two types of rollovers -- direct and indirect. With a direct rollover, you would fill out a form with the new investment firm that you wish to transfer the annuity to, and authorize them to collect the funds from the investment firm who now holds the annuity. The money would then be send directly from the current firm to the new firm.

With an indirect rollover you withdraw the money yourself from the firm who currently holds it, and then you have 60 days time in which to reinvest it with the new firm in another annuity investment.

If you choose the direct rollover method, then no reporting needs to be done to the IRS. If you choose the indirect rollover method, then the firm who currently holds the investment will send you a 1099-R form to show the amount you withdrew. You will report that as pensions received on your tax return, but as long as you rolled it over within 60 days, you will show the taxable portion of that distribution to be zero.

If you make the indirect rollover, when you reinvest the funds, be sure to tell the company you are investing with that these are rollover funds so they can report it properly to the IRS and they will have a record of the day you reinvested the money.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you JJ.
Customer: replied 5 years ago.
1035 exchanges do apply to an annuity. This answer is worthless.
Expert:  Merlo replied 5 years ago.
Hello again JJ

Is this annuity part of an IRA account?

Customer: replied 5 years ago.
No. This is a Deferred fixed annuity from Lincoln National. The IRS told me that I can do a 1035 contract exchange if the proper tax paper work is done. I want to know how to do that when I file my tax return.
Expert:  Merlo replied 5 years ago.
Hello again JJ,

I apologize, as I assumed this annuity was part of an IRA account, in which case the transfer would have been classified as a rollover.

There are different rules for a 1035 exchange of an annuity contract, and while I know the basics, I would rather have someone who is more familiar with the details that would be involved answer your question.

For that reason, I am going to put your question back on the open board to see if one of the other tax consultants in this forum can help you.

In the meantime, make sure you do not Accept this answer, that way your account will not be charged. You should not accept any answer until you have received a complete answer to your question which has helped you.

In the meantime, let me put your question back on the board and see if there is not someone here who can give you more details on this.

Thank you again JJ.

Expert:  Bill replied 5 years ago.

You cannot take a lump sum distribution from the annuity contract and purchase another annuity at another insurance and have it qualify as a tax-free 1035 exchange. The assets must be sent directly by the insurance company of the existing contract to the insurance company providing the new annuity contract.

 

To execute the 1035 exchange you would complete a 1035 exchange assignment form from the new company. The new company will complete the form agreeing to accept the exchange and forward the form to the old company. You will also probably have to sign nonqualified beneficiary acknowledge forms with the new company. The old company will then send the funds directly to the new company.

 

If the old insurance company issues a 1099-R they should enter code 6 in box 7 of the form which advises the IRS that it is a 1035 tax-free exchange. You would not have to report this on your tax return.

 

See codes on page 7 - http://www.irs.gov/pub/irs-pdf/f1099r.pdf

 

 

 

Customer: replied 5 years ago.
Does the policy stay in my mother,s name with myself as the beneficiary as it was first drafted or do I put it in my name now before the exchange?
Expert:  Bill replied 5 years ago.

It should be established as a beneficiary account with the current insurance company before the exchange. See the link below for an example of the processing steps.

 

http://www.sunlife-usa.com/univ/un_14.cfm

 

 

 

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and 7 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank You
Expert:  Bill replied 5 years ago.
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