Millions of American seniors who currently own an annuity are not aware of the IRS-approved planning technique that enables them to also benefit from 100 percent tax-free benefit payments should they need long-term care (LTC).
The planning technique utilizes a special provision of the tax code, a Section 1035 exchange. 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 lifetime.
Roughly eight million Americans have any type of long-term care insurance that will pay for LTC costs. However, millions already have an annuity designated as their ‘what if’ funds. The latest data gathered by various industry research groups including LIMRA reveal that some $2.8 trillion is invested in non-qualified annuities.
Simply stated, the law now allows for an annuity owner to re-purpose their current annuity into one that meets IRS criteria. The new annuity continues to grow in value on a tax-deferred basis.
The reasons to consider a change are multiple. For many, there can be significant tax savings should a need for long-term care arise at a future date. Monies can be withdrawn from an annuity to pay for long-term care.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 new criteria can continue to grow in value. But, all funds withdrawn to pay for a LTC need are received completely free of income taxes.
Second, many of the new annuities created to provide consumers with both tax deferred annuity growth and tax-free long-term care benefits, also offer some rather unique financial planning opportunities. An example shown in the just published Guide To Long-Term Care Planning Using 1035 Exchanges, explains how a one existing annuity valued at $200,000 could be re-purposed into a plan that provides both spouses with an unlimited or lifetime long-term care benefit of $5,000 monthly. If neither of the spouses 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 varied 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 multiple companies. In addition, implementing an exchange incorrectly can result in tax consequences, something a knowledgeable and experienced professional should be competent in helping you avoid.