Long-Term Care Annuities PC1367-Print

WHAT ABOUT TAXES? Generally, withdrawals from an annuity are considered to come from earnings first and are subject to income tax. With respect to long-term care annuities in particular, prior to 2010, payments of long-term care benefits from annuities were also deemed to have been taken from annuity earnings first, then principal. Thus, each long-term care benefit payment was taxed as ordinary income to the annuity owner until all earnings within the annuity had been exhausted. Beginning January 1, 2010, potentially favorable tax treatment applies to certain withdrawals from annuities purchased after 1996, if the withdrawals are used to pay for qualified long-term care insurance coverage. This means you won’t have to pay income tax on the benefits you receive from your long-term care annuity used to pay for long-term care expenses. MORE ON EXCHANGES Prior to 2010, you couldn’t exchange your annuity for a long-term care insurance policy without incurring income tax on the earnings portion of the annuity. Now you can exchange your deferred annuity for either a stand-alone long-term care insurance policy or a long- term care annuity on a tax-free basis. However, with any exchange, be sure your current annuity has reached maturity before exchanging it; otherwise surrender charges may reduce your current annuity’s value. Also, if you exchange your current annuity for a long-term care annuity, you will likely incur a new surrender charge period that accompanies the new long-term care annuity. Surrender charges may apply to withdrawals you take from your annuity. However, surrender charges generally do not apply to long-term care benefit payments. Before entering into an exchange, you should talk to your financial professional or tax professional to be sure the exchange will be tax free. PLUSES/MINUSES As with most insurance products, there are pluses and minuses to consider in determining whether a long-term care annuity is right for you. On the plus side:   Long-term care annuities allow for tax-free withdrawals if used to pay for qualified long-term care coverage   With typical long-term care insurance, if you don’t use the coverage, you generally don’t get a return of your premiums; but with a long-term care annuity, at your death you can pass any remaining annuity balance to your beneficiaries   If you’re not in the best of health and you want some long-term care protection, you might not be able to qualify for stand-alone long-term care insurance. But, it’s generally easier to qualify for a long-term care annuity (e.g., you probably won’t need a physical   Once you put money in the annuity, you don’t have to make any more premium payments as you would with stand-alone long- term care insurance policies On the other hand:   Most long-term care annuities are funded with a single premium payment of at least $50,000, so you may need to have at least that much available in a lump sum   Since the cost of the long-term care portion of the annuity is deducted from your investment in the annuity (and not the earnings), you can’t take the cost of long-term care as a medical expense deduction   Long-term care annuities, like most deferred annuities, come with surrender charges, so taking money out of the annuity that’s not used for long-term care expenses may be subject to surrender charges, income tax, and a penalty of 10% if taken before age 59½  Currently, long-term care annuities do not qualify as partnership plans, which otherwise afford some asset protection when trying to qualify for Medicaid Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or le- gal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable – we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. To explore how the preceding article could potentially impact your situation, please contact a Commerce Trust advisor. 1-855-295-7821 | commercetrustcompany.com

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