Tuesday, July 24, 2012

Charitable Gift Annuity

A charitable gift annuity is a contract between a donor (the annuitant) and an organization. A charitable annuity is set up for two reasons: one, to provide a retirement income for the donor and two, to provide a charitable gift to the organization after the death of the donor. The organization can be a number of charitable causes. They are commonly used to donate to universities, churches and even organizations such as the Red Cross.

 A charitable gift annuity will usually guarantee a retirement income stream for a certain period of time (or lifetime) based on the amount of assets that are deposited into the annuity. The issuing organization of the annuity usually uses standards set forth by the American Council on Gift Annuities to write their annuity policies; and insure that the charitable gift annuities are being set up properly from an actuarial standpoint. This helps protect both the organization and the donor.

The deposit into a charitable gift annuity can be cash, securities, land or other forms of assets with real value. The charity will remain in control of the assets indefinitely. Charitable gift annuities are regulated by the individual states and the issuing charity must prove to that state that the gift annuities that it is issuing are meeting that states guidelines for actuarial standards. (Again, ACGA helps guide these charities in this area.) Lastly, the charities must keep a close ongoing valuation of its asset's value to insure that it is paying out the correct amount based on actual value of the assets not the "book value". If you have any more questions on Charitable Gift Annuities, especially in North Carolina feel free to contact us for a free phone, email or face to face consultation.

Tuesday, July 10, 2012

What is a 1035 Exchange?

What is a 1035 exchange?

Disclaimer: This post will describe what a 1035 exchange is as we have learned it in the field by performing hundreds of exchanges. Tax laws constantly change, this will give you a general idea of what a 1035 exchange is and that is all it is designed to do. Please check with your company or tax professional to confirm any of this information.

A 1035 exchange as it is known in the insurance industry is IRS tax code that allows for money to be moved from like life insurance policies to to other like life insurance policies or from like life insurance policies to like annuities under tax code number 1035. By like policies I am referring to the fact that the life policies that participate in the exchange must be similar. For example, you cannot move money from a survivor or second to die life policy to a single life policy or vice versa. (Same goes for single life annuities and joint annuities.) You cannot exchange money from an annuity to a life insurance policy. You can however move money under this code from a life to annuity policy, and you can also exchange value from annuity to annuity. Also, the Pension Protection Act , which was revised January of 2010 allows for exchange from current annuities and life policies to new annuities and life policies with long term care payout benefits.
A 1035 exchange is useful to avoid a taxable event in surrendering or exchanging insurance contracts. If you have growth in your life insurance or annuity policy, meaning more money than your "basis" or what you have paid in, then the growth of that policy is considered a taxable distribution if taken via surrender or withdrawal. This tax can be avoided if a 1035 exchange is properly executed.

Ok, I hope that is clear and I tried to put it in layman's term as best I could. Below,  I will post verbatim the tax code from the IRS. If you have any questions contact me and I will be glad to answer any questions.

    Sec. 1035. Certain exchanges of insurance policies
    (a) General rules
      No gain or loss shall be recognized on the exchange of -
        (1) a contract of life insurance for another contract of life
      insurance or for an endowment or annuity contract or for a 
      qualified long-term care insurance contract;
        (2) a contract of endowment insurance (A) for another contract
      of endowment insurance which provides for regular payments
      beginning at a date not later than the date payments would have
      begun under the contract exchanged, or (B) for an annuity
      contract, or (C) for a qualified long-term care insurance contract;
        (3) an annuity contract for an annuity contract or for a
      qualified long-term care insurance contract; or
        (4) a qualified long-term care insurance contract for a 
      qualified long-term care insurance contract.
    (b) Definitions
      For the purpose of this section -
      (1) Endowment contract
        A contract of endowment insurance is a contract with an
      insurance company which depends in part on the life expectancy of
      the insured, but which may be payable in full in a single payment
      during his life.
      (2) Annuity contract
        An annuity contract is a contract to which paragraph (1)
      applies but which may be payable during the life of the annuitant
      only in installments. For purposes of the preceding sentence, a 
      contract shall not fail to be treated as an annuity contract 
      solely because a qualified long-term care insurance contract 
      is a part of or a rider on such contract.
      (3) Life insurance contract
        A contract of life insurance is a contract to which paragraph
      (1) applies but which is not ordinarily payable in full during
      the life of the insured. For purposes of the preceding sentence, 
      a contract shall not fail to be treated as a life insurance 
      contract solely because a qualified long-term care insurance 
      contract is a part of or a rider on such contract.
    (c) Exchanges involving foreign persons
      To the extent provided in regulations, subsection (a) shall not
    apply to any exchange having the effect of transferring property to
    any person other than a United States person.
    (d) Cross references
          (1) For rules relating to recognition of gain or loss where
        an exchange is not solely in kind, see subsections (b) and (c)
        of section 1031.
          (2) For rules relating to the basis of property acquired in
        an exchange described in subsection (a), see subsection (d) of
        section 1031.

Thursday, July 5, 2012

Medicare & Medicaid

I talk to many people every week about long term care and where it fits into Medicare and Medicaid. These terms can be confusing. Both are government programs and they sound a lot alike. It was probably not the best idea to name them so similarly, but what is done is done. I will help try and shed some light on the roles of each program in a quick and easy post.

Medicare was started in 1965 by the Federal Government to help US citizens or permanent residents over the age of 65 pay for the medical costs. Medicare is funded entirely by the Federal Government. If you or your spouse have been paying into Medicare for 10 years or more then you are eligible for Medicare at age 65. The idea of Medicare, a social insurance, is to spread the risk of medical costs across a society that is paying in. Medicare does not cover long term medical care needs, it is designed to cover restorative care or care that heals only. Long term care is care that helps you maintain your every day needs or activities of daily living. We have six activities of daily living: eating, dressing, bathing, toileting, continence (other bathroom needs like shaving and nail clipping) and transfer (movement). Medicare is not designed to cover these costs.

Medicaid is also a social program that helps those US citizens and residents cover their medical needs. However, Medicaid is a means tested social program. This basically signifies that your income and assets need to be at certain levels (usually current poverty line or below) to qualify for the aid. Medicaid can cover children of low income parents and the disabled as well. Medicaid is jointly funded by the Federal and State Governments and managed by the individual states. Medicaid is designed to be social protection and covers more health care services than Medicare. Medicaid will cover long term care needs in the facilities and with providers that they have approved.

So next time you get a little confused on the difference between Medicare and Medicaid and its role with long term care, come back to this post, I hope it helps clear up the confusion. If you have any further questions regarding Medicare and Medicaid feel free to contact me . (Especially, if you have any questions on Medicaid in NC, my resident state.)