The IRS has changed the rules governing partial exchanges of annuity contracts after receiving taxpayer complaints and reports of difficulties after a 2008 revenue procedure on the subject. The new rules will be effective for partial exchanges that are completed on or after October 24, 2011.
Existing Rules for Tax Treatment of Partial Exchanges (Revenue Procedure 2008-24)
Currently, if amounts are withdrawn or surrendered from either annuity contract for a 12-month period beginning on the date the exchange proceeds are received by the recipient carrier, the partial exchange is retroactively disqualified unless one of the following events occurs after the exchange and prior to withdrawal, annuitization, change of ownership or surrender:
- The owner reaches age 591/2, dies or is disabled
- The owner's divorce becomes final
- The owner loses employment
- The amount withdrawn is allocable to investment in the contract before August 14, 1982 ; or
- The distribution is from a structured settlement annuity.
Changes to Rules Effective October 24 (Revenue Procedure 2011-38)
- The period under consideration is shortened to 180 days.
- The rule that a taxpayer involved in a tax-free partial annuity exchange be age 59 1/2, dying or disabled, or experience a similar life-changing event, is eliminated.
- The IRS ends the limitation on amounts withdrawn from or received under an annuity contract involved in a partial exchange if the amounts received on an annuity occurred over a period of 10 years or more or during one or more lives: and
- The IRS eliminates automatic characterization of a transfer as either a tax-free exchange under section 1035 or a distribution taxable under section 72 (e) followed by a payment for a second contract.
The IRS says it will use "general tax principles" to characterize a transfer.
Sources:
journalofaccountancy.com July 28, 2011
immediateannuities.com 2008 Library articles