L&HMImedium
A Michigan client exchanges one non-qualified deferred annuity for another under IRC Section 1035. For purposes of MI's annuity best-interest rule, this transaction is treated as:
AA new sale, not subject to replacement disclosure
BExempt because no taxable event occurs under federal tax law, so no suitability review is required
CExempt because the client initiated it, so no insurer notice is required
A replacement requiring a best-interest analysis and replacement disclosure
Why this is the answer
Even though IRC Section 1035 provides federal tax deferral, the Michigan replacement regulation and 2022 best-interest annuity rule treat any transaction in which an existing annuity is surrendered, lapsed, reduced, borrowed against, or otherwise used to fund a new annuity as a replacement requiring full disclosure, notice to the existing insurer, and a documented best-interest analysis.
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