IRS Final Regulations Clarify 1035 Exchange Treatment for Life Insurance Policies

Short summary

The IRS finalized regulations (T.D. 10052) fixing the unintended consequence where Section 1035 exchanges of life insurance contracts were treated as reportable policy sales. Under the new rules, a 1035 exchange alone no longer triggers transfer-for-value limitations or Form 1099-LS reporting. Prior taint from a reportable policy sale carries over but the exchange does not create new taint. Life settlement fund managers and PPLI users can now restructure portfolios with reduced uncertainty.

• •1035 exchanges no longer automatically treated as reportable policy sales or transfers for value
• •Death benefit exclusion status carries over from old contract to new contract without new taint
• •Form 1099-LS reporting no longer required for exchanges; information passed between issuers via Form 1099-R

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