Can the exchange of an annuity for a life insurance policy be tax-free?
No.
The exchange is fully taxable to the extent of any gain in the annuity policy.
The IRS will not allow taxable ordinary income from an annuity to be converted into tax-free life insurance proceeds on death.
What is the cost basis of the new annuity or life insurance policy?
Immediately after the exchange, the cost basis of the new annuity or life insurance policy will be the same as the cost basis of the old one.
Is a Form 1099-R issued for a 1035 Exchange?
Generally, a 1099-R is issued only when the exchange is with a new insurance company.
If a 1099-R is issued the exchange is reported on your tax return, Form 1040, Line 16.
The full amount received is reported on Line 16(a) and the “taxable amount” on Line 16(b).
Assuming a full, valid 1035 exchange, the taxable amount will be zero.