If the current carrier does not provide a Medicaid Compliant Annuity, the tax-deferred annuity can be “transferred” to the desired carrier by way of a 1035 exchange.
A 1035 exchange refers to the section of the tax code that allows investors the flexibility to exchange one annuity for another without incurring any immediate tax liabilities. Generally, the surrender of an existing insurance contract is a taxable event since the contract owner must recognize any gain on the old contract as current income. However, under IRC § 1035, when one life insurance, endowment, or annuity contract is exchanged for another, the transfer will be nontaxable, provided certain requirements are met.
Requirement One: Ownership
The owner and insured, or annuitant, on the new contract must be the same as under the old contract. However, changes in ownership may occur before the change is completed.
Requirement Two: Like for Like
Any type of contract cannot be exchanged for any other type of contract. The following rules must be followed in order to avoid tax consequences:
- Old Life Contract » New Life Contract
- Old Life Contract » New Annuity Contract
- Old Endowment Contract » New Annuity Contract
- Old Annuity Contract » New Annuity Contract
The exchange process can be initiated by simply completing a transfer form with the new Medicaid Compliant Annuity application.
These are highly specialized financial products and only a select few firms in the industry have expertise in this area. Because qualification (or potential ineligibilty) for Medicaid benefits and, possibly, one’s life savings are at stake, you should only consult with a qualified professional advisor. The Wall Law Group welcomes your inquiries in this regard.