Millions of older Americans who currently own an annuity are unaware of the IRS-approved planning technique that allows them to also benefit from 100 percent tax-free benefit payments should they need long-term care (LTC).
Technical planning uses a special provision of the tax code, a change from Section 1035. The law, passed by Congress, was designed to encourage more Americans to plan for the real risk of needing care at some point in their lives.
Approximately eight million Americans have some form of long-term care insurance that will pay for LTC costs. Yet millions already have an annuity designated as their “what if” funds. The latest data compiled by various industry research groups, including LIMRA, reveals that around $2.8 trillion is invested in non-qualified annuities.
Simply put, the law now allows an annuity owner to repurpose their current annuity to one that meets IRS criteria. The new annuity continues to grow in value on a tax-deferred basis.
The reasons for considering a change are multiple. For many, there can be significant tax savings should the need for long-term care arise at a future date. Money can be withdrawn from an annuity to pay for long-term care. However, there may be income tax consequences. That means the risk of facing a tax bill at a time when funds are critically essential.
An annuity that meets the new criteria can continue to grow in value. However, all funds withdrawn to pay for an LTC need are received completely free of income tax.
Second, many of the new annuities created to provide consumers with tax-deferred annuity growth and tax-free long-term care benefits also offer some pretty unique financial planning opportunities. An example shown in the just-published Guide to Long-Term Care Planning Using 1035 Exchanges explains how an existing $200,000 annuity could be repurposed into a plan that provides both spouses with a long-term care benefit. unlimited or lifetime term of $5,000 per month. If neither spouse needed long-term care, the annuity would eventually pay the designated beneficiary $202,000 upon the death of the second spouse.
Sold by many financial advisors and investment professionals, the new forms of annuity contracts offer a variety of benefits and options. Because some professionals may only favor or offer annuities from one company, experts advise working with a 1035 exchange specialist familiar with several companies. Furthermore, incorrectly implementing an exchange can have tax consequences, something that a knowledgeable and experienced professional should be competent to help you avoid.
