Recent IRS Private Letter Ruling on Post-Death Tax Free Annuity Exchanges

The IRS recently issued a private letter ruling with regard to the income tax free exchange of annuity contracts under Section 1035 of the Internal Revenue Code. In PLR 201330016, the IRS approved the tax-free exchange by a post-death beneficiary of multiple annuity contracts (five contracts) for one new contract issued by a different company since the new contract did not extend the payout period under the original contracts. The result is not a watermark event (many tax advisors thought that 1035 exchange treatment was available to post-death beneficiaries of such contracts), but it does provide annuitants and their advisors with comfort regarding the use of the technique.

While a PLR can only be relied upon by the taxpayer requesting the ruling (and thus it has no precedential value), it does provide insight into the IRS’s thinking on this issue. Advisors and their clients should be aware of the ruling as it could be a platform for flexible planning as well as potential abuse (such as churning contracts).

For more information on planning, contact Preti Flaherty estate planning attorney Richard Ploss and for concerns about unsuitable or improper annuities-related advice contact Preti Flaherty attorney Sigmund Schutz.