Last week we talked about 4 ways to tap into the cash of your life insurance policy. This week, we are taking it to the next level and will outline ways to exchange (or rollover) an existing annuity, life insurance or endowment policy for a better policy whilst deferring tax on the transaction.
Since President Biden has proposed increasing capital gains from the current 20% to 39.6% (let’s call it 40%) for those in the top income bracket, tax loopholes like the 1035 and 1031 exchange become even more valuable.
A 1035 exchange is defined as is a provision in the IRS tax code (1035) allowing for a tax-free transfer (or rollover) of an existing annuity contract, life insurance policy or endowment for another one of like kind.
It is easier to understand the power of 1035 exchanges by using examples of when it is in a client’s best interest to take advantage of this tax loophole. Scenarios when we used the 1035 exchange to improve client positions over the past 3 years include:
DISCLAIMER: The 1035 exchange check must go directly from one insurance company to another. The policyholder cannot ever receive (called constructive receipt) the check!
The 1035 exchange is a powerful tool for insurance and financial advisors that is under-utilized mostly due to ignorance or a lack of creativity. There is a similar tool called a 1031 exchange available for real estate.
DISCLAIMER: Please consult with your realtor, financial advisor, and real estate attorney before deciding if a 1031 exchange is right for you.
I reached out to interview George Russo over the weekend as I know he has extensive 1031 exchange experience, for an explanation and some tips.
In real estate, a 1031 exchange is a swap of one investment (or business) property for another (considered like-kind) that allows capital gains to be deferred, not eliminated. It can work if you are looking to sell an investment property, you do not need the money and do not want to pay the capital gains taxes. Savvy investors use 1031’s to defer capital gains and build wealth!
George said, “it is critical to know the rules and work with experienced advisors when handling these sophisticated transactions.” Steps he mentioned include:
Although Covid-19 has its challenges, there are also opportunities to improve your financial position and quality of life for the LONG-HAUL!
If you are interested in a life insurance or annuity policy review, feel free to reach out to me at Rob@InsuranceDoctor.us.
It has been a joy writing my “Financial Wave” column for The Wave as we approach our 1-year anniversary on May 1st, 2021!