IRS Modifies Partial 1035 Exchange Rules
The IRS has modified the partial 1035 exchange revenue procedure. Effective Oct. 24, 2011, Rev. Proc. 2011-38 reduced the 12-month withdrawal restriction to 180 days.
Prior to this date, a distribution in the first 12 months, from a policy that was involved with a 1035 exchange, could disqualify the tax-exempt status of the exchange. There were several exceptions to this rule, and the IRS put the determination of the tax-exempt status on the financial institutions involved. The IRS modification shortens the distribution-restricted time frame to 180 days and significantly eases the burden of administering these exchanges.
The rule requiring a 72(q) condition to be met to take a distribution has been eliminated. In addition, most partial annuitizations are not affected by the ruling, as it does not apply to payment received as an annuity for a period of 10 years or more or during one or more lives. Finally, the IRS will determine if a partial 1035 exchange has failed, rather than the institutions involved automatically amending tax reporting.
New Rules Easier For Clients To Understand
The advantage to you is that it will be simpler to explain the rules to your clients who wish to do a partial 1035 exchange. It is important to note, however, that while The Standard accepts and processes partial 1035 exchanges, some financial institutions do not allow them. Always check with the other carrier to ensure that the partial 1035 can occur prior to completing the paperwork.
If you have any questions about The Standard's requirements for a 1035 exchange, either into our annuity products or those of another carrier, please contact our Customer Service Representatives at 800.247.6888.