IRS Releases Annuity-LTC Exchange Guidance
August 16, 2011 by Allison Bell
By ALLISON BELL
has come out with a document, IRS Notice 2011-68, that discusses the tax rules
that apply to annuity-long term care (LTC) benefits hybrids and exchanges of
annuity cash surrender value for qualified LTC insurance.
Tax experts at the American Council of Life Insurers (ACLI), Washington,
asked the IRS to put those issues on its 2011-2012 guidance priority list just
two months ago, to help taxpayers make better use of their new freedom to
exchange LTC insurance policies for other LTC insurance policies — and life and
annuity contracts for LTC insurance policies — without necessarily paying any
extra income taxes.
Section 1035 of the Internal Revenue Code (IRC) has been letting taxpayers
trade in life and annuity products for other life and annuity products tax-free
for many years. A provision in the Pension Protection Act of 2006 added IRC
Section 844, which lets taxpayers get or dispose of LTC policies through
tax-free Section 1035 exchanges
been sure how to report the exchanges, or how the exchanges might affect their
income tases, the ACLI tax experts told the IRS in a comment on the IRS guidance
development priority list.
The ACLI tax experts asked the IRS to confirm that premiums paid for
annuity-LTC combination product are included in the investment in the
contract.
In IRS Notice 2011-68, IRS officials say they believe all premiums paid for an
annuity-LTC combination contract that is an annuity and also provides long-term
care insurance are generally included in investment in the contract, as long as
the combination premiums are credited to the contract’s cash value,
rather than directly to the LTC insurance contract, and coverage under the LTC
insurance contract is paid for by charges against the cash value of the
contract, officials say.
IRS officials also have confirmed that a taxpayer can use a
Section 1035 exchange to trade in a portion of the cash surrender value of an
existing deferred annuity for a qualified LTC contract, and the officials have
discussed the basis of a qualified LTC contract.
In a Section 1035(a) exchange, “the acquired property’s adjusted basis
shall be the same as that of the property exchanged, decreased in the amount of
any money received by the taxpayer and increased in the amount of gain or
decreased in the amount of loss to the taxpayer that was recognized on such
exchange,” officials say. “Accordingly, Treasury and the IRS
believe that … the adjusted basis of a qualified long-term care insurance
contract received in a tax-free exchange under Section 1035(a) generally carries
over from the life insurance, endowment, annuity, or qualified long-term care
insurance contract exchanged.”
The officials note that PPA added Section
6050U to the Internal Revenue Code. IRC Section 6050U requires a
person who makes a charge against the cash value of an annuity contract, or the
cash surrender value of a life insurance contract, that is excluded from gross
income to file an information return reporting the total amount of the charges
for the year, the amount of the reduction in investment in the contract
resulting from the charges, and the name, address, and taxpayer identification
number of the holder of the contract.
The IRS also has included a section of questions for the public it may
use to develop additional guidance for life and annuity contracts with LTC
insurance features.
The IRS asks questions such as, “What issues arise when
the owner of an annuity contract with a long-term care insurance feature decides
to annuitize the contract?” and, “For the purpose of determining whether the
long-term care features of an annuity contract qualify as an insurance contract
and thus as a qualified long-term care insurance contract, what is the
appropriate characterization of long-term care payments that cause a reduction
in a contract’s cash value?”
Comments on the notice are due Nov. 9.
