Post-Death 1035 Exchange
I have a client who was named the primary beneficiary on his mother’s non-qualified annuity held at AIG. His mother passed away in December and he has not moved the account. AIG considers the account in “claim” status. My client is concerned about keeping these assets at AIG and is considering transferring them out. However, he has about $140,000 in gains in the account that he does not want to be taxed on immediately.
My question is, are there any alternatives to paying those taxes immediatley? Such as transferring this money as a 1035 Exchange to another non-qualified annuity with another carrier? AIG will not allow a non-qaulified stretch. The account is currently titled in the following format:
(Deceased Name) Date of Death
In the Care of (Son’s Name) Beneficiary
I was told by a colleague that there was a possiblity of transferring this account to another carrier without creating a taxable event to the client, as long as AIG would show on their 1099 that it was a “Code 6” type of transfer or “Section 1035 Exchange” transfer.
Assuming this is possible, I understand that the beneficiary would have to either take the 5 year payout option or the lifetime payout based on his life expectancy.
Thank you!
Permalink Submitted by Al Fry on Sun, 2009-04-26 15:41
The annuity Company I previously worked for was one of the few that would accect 1035s of the death benefit. The key hear, as you said, is that the ceding company code as a 1035. The money MUST be directly tranferred into a new annuity. Non-spouses (and spouses, if NQ) can NEVER do a rollover. Some companies will require a hold harmless agreement.
Permalink Submitted by Saleah Harpole on Tue, 2009-04-28 14:50
Thank you for your response and the useful information. Do you mind me asking which company it was that you worked for? I have also heard that there are only a few carriers that will accept this type of transfer.
Thank you!
Saleah
Permalink Submitted by Al Fry on Tue, 2009-04-28 15:17
Lincoln Financial Group. A Lincoln agent or most any custodian (such as Jones, Edwards, M-L, or Indepedants) can provide Lincoln products.
Permalink Submitted by Saleah Harpole on Tue, 2009-04-28 19:39
Thank you for the information. I have contacted Lincoln Financial Group and you are correct, they will accept the 1035 of the death benefit and they will set it up as a Non-Qualified Stretch Annuity for the new owner/beneficiary. The beneficiary will then need to take out RMD’s based on his life expectancy.
The individual I spoke with at Lincoln said that if AIG will not allow the Non-Qualified Stretch (which I have confirmed they will not), and if they will not code the distribution on their 1099 as a “Section 1035 Exchange” or a “Code 6”, then the client may need to complete and submit a form to the IRS showing that they did a 1035 Exchange with these assets. Are you familiar with that particular IRS form?
Thank you again for all your help!
Saleah