The question was: Does tax liability arise when a policyholder exchanges one annuity contract for another?
The answer is: The Internal Revenue Code provides that the following are nontaxable exchanges [IRC Sec. 1035(a)]:
(1) the exchange of a life insurance policy for another life insurance policy or for an endowment or annuity contract;
(2) the exchange of an endowment contract for an annuity contract, or for an endowment contract under which payments will begin no later than payments would have begun under the contracts exchanges;
What Your Peers Are Reading
(3) the exchange of an annuity contract for another annuity contract.
These rules do not apply to any exchange having the effect of transferring property to any non-United States person. [IRC Sec. 1035(c)]
For exchanges after 2009, an annuity contract may be exchanged for a qualified long term care insurance contract. [IRC Sec. 1035(a)(c)]
If an annuity is exchanged for another annuity, the contracts must be payable to the same person or persons. Otherwise, the exchange does not qualify as a tax-free exchange under IRC Section 1035(a). [Treas. Reg. ?1.1035-1]