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Exploiting the 1035 exchange rules
Old 06-20-2014, 07:25 AM   #1
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Exploiting the 1035 exchange rules

I haven't seen any discussion of this on the boards; my apologies if it has already been discussed elsewhere.

In the book "This is not your parents retirement" author Patrick Astre offers an unusual tax saving strategy that I might be able to use. I'm wondering if any of our experts has heard of or used it:

The IRS recognizes "1035" tax deferred exchanges that allow a person to move cash value and cost basis from one life insurance policy to another, or to an annuity (Hold the grenades - I know annuities are generally not good especially in low interest times.)

I have a 10-year level term policy that will expire in October 2014.
Total premiums paid (cost basis) = $5280.00
Cash value = $0.00 (it's a term policy)

So if I "exchange" my term policy for an immediate fixed annuity for $50000 I can add the $5280.00 for a total basis $55280.00.

This would allow me to shelter most all of the return - effectively making my old term policy premiums tax-deductible. The funding would be helpful to make our "bridge" to age 59.5

What do you think?

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Old 06-21-2014, 04:32 PM   #2
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My wife had an endowment mortgage in the UK. This was a strange beast where you just paid the interest on the loan and instead of paying principle it got invested in the market to pay the principle at maturity. They lost popularity when people discovered they didn't work.
While trying to reduce my FBAR and 8938 exposure I considered using 1035 exchange to try and get the money into the US without tax consequences. The policy matures in 2018 but I might be able to get out early if they will talk to a 'US Person'.
I found a pro that understands this and his view was that it only made sense with the costs if I had a legitimate need for some insurance in the US. So I left it at that until it matures or something comes up.
This was all a couple of months ago.
I think this could well be a good strategy sometime to trade costs for tax deferment. Have to get out the spreadsheets.

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Old 06-21-2014, 05:03 PM   #3
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Originally Posted by BrianB View Post
I have a 10-year level term policy that will expire in October 2014.
Total premiums paid (cost basis) = $5280.00
Cash value = $0.00 (it's a term policy)

So if I "exchange" my term policy for an immediate fixed annuity for $50000 I can add the $5280.00 for a total basis $55280.00.
I don't think 1035 applies to a term policy with no cash value.
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Old 06-21-2014, 11:20 PM   #4
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+1 1035 allows one to effectively transfer the tax deferred inside buildup from one contract to another and avoid taxes. Since a term policy doesn't have any tax deferral (value = tax basis = 0) the concept doesn't apply.

There are several policy types that allow for the transfer of your cash value, but term life insurance is not one of them. Term life insurance has no cash value for the insured. Additionally, you cannot avoid income taxes by purchasing a term policy with the cash value from an existing whole, variable, universal or indexed life contract.
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Old 06-22-2014, 12:20 AM   #5
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there is no value to exchange in a term policy! afraid this doesn't work.
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