The Internal Revenue Service (IRS) has come out with a document, IRS Notice 2011-68, that discusses the tax rules that apply to annuity-long term care (LTC) benefits hybrids and exchanges of annuity cash surrender value for qualified LTC insurance.
Tax experts at the American Council of Life Insurers (ACLI), Washington, asked the IRS to put those issues on its 2011-2012 guidance priority list just two months ago, to help taxpayers make better use of their new freedom to exchange LTC insurance policies for other LTC insurance policies — and life and annuity contracts for LTC insurance policies — without necessarily paying any extra income taxes.
Section 1035 of the Internal Revenue Code (IRC) has been letting taxpayers trade in life and annuity products for other life and annuity products tax-free for many years. A provision in the Pension Protection Act of 2006 added IRC Section 844, which lets taxpayers get or dispose of LTC policies through tax-free Section 1035 exchanges
Although taxpayers have had the freedom to make the exchanges, they have not been sure how to report the exchanges, or how the exchanges might affect their income tases, the ACLI tax experts told the IRS in a comment on the IRS guidance development priority list.
The ACLI tax experts asked the IRS to confirm that premiums paid for annuity-LTC combination product are included in the investment in the contract.
In IRS Notice 2011-68, IRS officials say they believe all premiums paid for an annuity-LTC combination contract that is an annuity and also provides long-term care insurance are generally included in investment in the contract, as long as the combination premiums are credited to the contract’s cash value, rather than directly to the LTC insurance contract, and coverage under the LTC insurance contract is paid for by charges against the cash value of the contract, officials say.
IRS officials also have confirmed that a taxpayer can use a Section 1035 exchange to trade in a portion of the cash surrender value of an existing deferred annuity for a qualified LTC contract, and the officials have discussed the basis of a qualified LTC contract.