Little Known Law May Help Seniors Needing Long Term Care

                On August 17, 2006, President George W. Bush signed into law the Pension Protection Act of 2006.  The average American probably never heard of the law but some provisions in that law, which became effective in 2010, can be a real boon to Americans struggling to find ways to pay for long term care.

                Many seniors own annuity contracts.  Individuals who own annuities can now add long term care riders with special tax advantages.   The Pension Protection Act allows the cash value of annuity contracts to be used to pay premiums on long term care contracts.  Money coming out of the annuity in this way is treated as a reduction of the cost basis of the annuity and thus is non-taxable.  The cost basis is generally going to be the amount of money originally deposited with the insurance company when the annuity was purchased.

                In addition, the Act allows annuity contracts without long term care riders to be exchanged for contracts with such a rider in a tax free transfer under Section 1035 of the Internal Revenue tax code.   This may be helpful to individuals who own annuities that have a low cost basis and are not in the best of health.  The annuity’s cash value can be used to purchase long term care coverage, and there is no tax owed because the exchange of one contract for another does not trigger any income tax that would normally be owed upon the sale of the current annuity.  It’s all because of Section 1035 of the IRS tax code.

                It all sounds complicated but next week I’ll run through a brief case study to show it can work.

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