1035 is a section of the United States Tax Code. The section allows an individual to directly transfer money from one plan (life insurance or annuity) to another without tax consequences. The key word is "directly." In other words, as long as the transfer, or exchange, is direct, it is not considered a taxable event. As such, if there are any gains in the former policy, those gains are considered transferred to the new policy and are not subject to taxes until the new policy is surrendered.
What qualifies as a tax free exchange? To qualify, there are a few simple guidelines:
- The insured and the owner must be the same on the new policy as on the existing policy.
- An annuity can be exchanged to another annuity.
- A life insurance policy can be exchanged for another life insurance policy.
- An annuity cannot be exchanged for a life insurance policy.
In light of the above, if an individual has an older life insurance policy, or policies, which no longer provide a significant life insurance benefit (the cash value is equal to the death benefit), it makes a lot of sense for the individual to consider a 1035 tax free exchange for a life insurance policy which includes an irrevocable funeral expense trust.
The life insurance policy which includes an irrevocable funeral expense trust is offered by an insurance company which operates in all states, to the exception of: Maine, New York, and Rhode Island. The typical investment amount for such a policy is $12,500.00, includes no medical underwriting - guaranteed issue, and the investment amount qualifies as a Medicaid spend-down.
For more information on this product, please contact Connie Ashley - Director of Medicaid Planning for Krause financial Services.
