IRS Issues Private Letter Rulings On Annuity Advisor Fee Proposals

The IRS has issued three private letter rulings that could help life insurers offer registered index-linked annuities through fee-based advisors. IRS official Rebecca Baxter ruled in all three cases, “the Fees are integral to the operation of the Adviser Contract.” She told the insurers that they can pay advisory fees directly to an annuity owner’s investment advisor, from the cash value of all three types of contracts, without the annuity owner having to pay federal income taxes on the cash flowing to the advisor.

“The Fees do not constitute compensation to the Adviser for services related to any assets of the Owner other than the Adviser Contract or any services other than investment advice services with respect to the Adviser Contract,” she wrote in the letters. “Therefore, the Fees are an expense of the Adviser Contract, not a distribution to the Owner.”

“We rule that Fees Taxpayer deducts from the Adviser Contract’s cash value and remits to the Adviser will not be treated as an “amount received” by the Owner of the Adviser Contract for purposes of section 72(e),” read the rulings.

Baxter applies the same legal provisions, regulatory provisions and analytical principles to variable annuities, fixed indexed annuities, and hybrid annuities.

The life insurers that asked for the letter rulings said they would limit the annual advisory fee payment amounts to 1.5% of the contract’s cash value.

Check out rulings one, two, and three.


More Articles