Section 1035 Annuity Exchange Practice Questions

A nonqualified deferred annuity has $80,000 of investment in the contract and $110,000 of value. The owner requests a direct transfer of the entire value to a new annuity in the same owner's name. Assume all other Section 1035 conditions are met. What is the best federal tax conclusion?

1. The $30,000 gain is automatically forgiven forever.
2. The direct annuity-to-annuity exchange can defer current recognition of the $30,000 gain.
3. The owner must recognize $110,000 of ordinary income at transfer.
4. The new contract receives an $110,000 tax basis simply because that is its opening value.

Priya tells her old insurer to surrender an annuity and mail the proceeds to her personal bank account. Two weeks later she buys a different annuity using the money. The old contract had untaxed gain. Which statement is most accurate?

1. The new purchase automatically converts the earlier surrender into a Section 1035 exchange.
2. The surrender ordinarily triggers tax consequences; later reinvestment does not by itself undo them.
3. There can be no tax because the money stayed within an insurance product category.
4. The only question is whether the new insurer waived its front-end charge.

An owner paid $60,000 into a nonqualified annuity. Its value is now $95,000. A valid full Section 1035 exchange moves $95,000 into a new annuity. Ignore later deposits and distributions. Which figure is generally the transferred investment in the contract?

1. $0, because a new policy number means a new tax history.
2. $35,000, because only the gain moves.
3. $60,000, because the prior investment generally carries over.
4. $95,000, because the new carrier received that amount.

A client proposes exchanging an existing annuity for a new life insurance policy and argues that life insurance can be exchanged for an annuity, so the reverse must also work. Which answer is best?

1. The reverse pairing automatically qualifies because both products are insurance contracts.
2. An annuity-to-life exchange is not one of the ordinary qualifying Section 1035 pairings.
3. Any exchange qualifies if both contracts have the same beneficiary.
4. The exchange qualifies only when a bank issues the life policy.

Alex owns and is annuitant under an existing contract. The proposed replacement names Alex's adult child as owner. The agent calls the transfer a routine tax-free exchange solely because the old and new products are annuities. What is the soundest response?

1. Owner identity never matters in a 1035 transaction.
2. A changed owner may create a separate transfer or gift and can defeat the assumed exchange result; obtain tax review.
3. The new beneficiary alone decides whether the exchange qualifies.
4. The transaction is tax free whenever the child is under age 30.

Morgan exchanges an annuity with $90,000 value into another annuity but asks the old carrier to send $15,000 personally and transfer the remaining $75,000. Which answer best reflects the tax issue?

1. Because most of the value moved, every dollar is automatically sheltered by Section 1035.
2. The $15,000 received personally requires separate tax analysis and may produce recognized income.
3. The $15,000 automatically becomes additional basis in the new contract.
4. The personal payment makes the new annuity a life insurance policy.

An old annuity has a $4,000 surrender charge. The new contract offers a guaranteed income rider the owner likes. The insurer can process a valid Section 1035 exchange. Which statement is accurate?

1. Section 1035 automatically waives the old surrender charge.
2. Tax deferral and surrender charges are different questions; the old charge may still reduce transferred value.
3. The charge is reimbursed by the IRS because the exchange is tax free.
4. No replacement review is needed once the tax treatment is confirmed.

A 20-year-old fixed annuity credits a minimum rate no longer offered on new contracts. The owner is considering a direct exchange into a new annuity advertising a higher current introductory rate. Which action best serves the owner?

1. Recommend immediate exchange because a higher first-year rate always wins.
2. Compare the full contract terms, including old minimum guarantee, new renewal rates, fees, liquidity, and expected holding period.
3. Ignore the old contract because tax deferral proves replacement is suitable.
4. Change the beneficiary first; the rate comparison then becomes unnecessary.

A customer holds an annuity inside a traditional IRA. The agent proposes moving it and calls the transaction a routine nonqualified-annuity Section 1035 exchange. What should the agent check first?

1. Whether the IRA's transfer or rollover rules govern the movement and whether both contracts remain properly titled.
2. Only whether the new annuity has a higher credited rate.
3. Only the customer's age at the first premium payment.
4. Whether the old annuity's beneficiary shares the agent's surname.

After a properly completed exchange between insurers, a client receives a Form 1099-R showing the transfer with the code the payer used for a tax-free exchange. The client assumes the mere form proves a taxable surrender. Which response is best?

1. The form itself conclusively means the entire transferred value is taxable.
2. Review the distribution code and transaction documents; reporting of an exchange does not by itself establish current taxable gain.
3. Destroy the form because no exchange can ever be reported.
4. Replace the new annuity immediately to cancel the form.

An owner directs the old insurer to transfer part of an annuity's value into a new annuity, leaving the original contract partly in force. An agent says every partial transfer automatically qualifies regardless of timing, ownership, or subsequent distributions. What is the best answer?

1. Correct; a partial exchange has no special conditions.
2. Incorrect; partial exchanges have their own tax guidance and later withdrawals can affect the analysis.
3. Correct if the old annuity has no surrender charge.
4. Incorrect only when the new insurer is based in Texas.

A retired owner wants to exchange a deferred annuity because a new sales illustration shows more income. The old annuity has a modest surrender charge and a death-benefit guarantee; the new one has rider fees and a new surrender period. Which response is most complete?

1. Process the exchange first and analyze the costs later.
2. Compare guaranteed and nonguaranteed values, fees, surrender terms, access to cash, beneficiaries, income mechanics, and tax transfer method before recommending.
3. Compare only the illustrated first payment.
4. Reject every exchange because Section 1035 is unavailable for annuities.