Failure Is Instructive: Learn from Your Own AND Others' Mistakes

September 7, 2016

Learn what not to do when requesting a post-death 1035 exchange.

I just got back from a trip to Chicago where I was able to attend a Cubs game for the first time. During the game, I couldn't help but think to myself how many "failed" seasons the team has had in their history—not winning a World Series in over 100 years—and how that history could have been different if they had learned from a few more of their and others' mistakes. Following this same line of thought, let's take a look at PLR 201625001 to learn what not to do when requesting a post-death 1035 exchange.

In a previous post, we discussed how a nonqualified stretch can be an effective way to receive a death payout from an annuity. Well, PLR 201625001 addresses the scenario in which a nonqualified annuity contract owner passed away, and then one of the beneficiaries requested the death payout as a lump sum and deposited it into his checking account. The beneficiary subsequently signed an application for an annuity with a different company and used the funds he received in the death payout lump-sum payment to fund the new annuity contract hoping it would receive tax-free treatment under IRC Section 1035 (i.e., 1035 exchange rules).

In its conclusion, the IRS focused on three revenue rulings that applied to IRC Section 1035; one of these rulings, Rev. Rul. 2007-24, had a very similar fact pattern to the facts under the PLR, and the IRS concluded that the rollover rules that apply to qualified retirement plans do not apply to IRC Section 1035. In other words, for the exchange to have been a valid post-death 1035 tax-free exchange, the money would need to have moved from the releasing annuity provider directly to the accepting annuity provider. 

So although this lesson learned from another's mistake might be a small one, you never know what lessons today will bring success to your business tomorrow. And who knows, maybe this is the year the Cubs have learned enough from their past failures to finally bring a World Series championship back to Wrigley Field.

If you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at RSG@PacificLife.com.


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Chad is currently an Attorney Consultant for the Corporate Law Department at Pacific Life. Previously, he was a Senior Retirement Strategies Consultant, bringing more than 13 years of industry experience to his role and providing technical insights to our sales team and registered representatives on a variety of issues including IRAs, qualified plans, annuities, and estate planning issues.

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