IRS Safe Harbor Proposal Needs Revising, Say Industry Groups
A safe harbor for the valuation of life insurance contracts proposed by the Internal Revenue Service has numerous shortcomings and should be revised, industry representatives say.
While generally agreeing it is appropriate for the IRS to establish a safe harbor establishing the fair market value of life insurance policies for tax purposes, both agent and company representatives say modifications in the proposed IRS formula are needed.
The comments were made during an IRS hearing on proposed regulations that were issued on Feb. 13, 2004, in conjunction with Section 412(i) plans and which require life insurance contracts be valued at fair market value.
One part of the proposed regulations establishes a new safe harbor for fair market value. The safe harbor value is the sum of all the premiums paid on the policy plus all earnings minus reasonable mortality charges and other reasonable charges actually charged and expected to be paid.
Under the proposal, the cash surrender value of the policy can be treated as the fair market value so long as it is at least as large as the safe harbor value.
But Lawrence Raymond, secretary of the Association for Advanced Life Underwriting, says life insurance agents have both general and specific concerns with the IRS approach. He testified on behalf of both AALU and the National Association of Insurance and Financial Advisors.
In general, he says, agents are concerned about the establishment of uniform valuation standards for most purposes under the Internal Revenue Code.
Raymond notes that in issuing its proposal the IRS was concerned about perceived problems involving the distribution of life insurance contracts from retirement plans. But as proposed, he says, the safe harbor appears to apply to several life insurance valuation scenarios, including distributions or sales from retirement plans, compensatory transfers, and estate and gift tax transactions.
Because of the diverse nature of these scenarios and the underlying contracts, we urge the IRS to exercise care in establishing uniform valuation standards that are targeted at a problem of limited scope, Raymond says.
More specifically, he says the safe harbor formula should be simplified by eliminating the cash value standard.