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February 28, 2005 at 07:00 PM
Federal officials have completed regulations that could limit insurers’ ability to wrap hedge funds and other “nonregistered” investments in annuity contracts and life insurance policies.[@@]
The Internal Revenue Service says the final version of the rule, “Diversification Requirements for Variable Annuity, Endowment And Life Insurance Contracts,” will start taking effect today. Insurers have until Dec. 31 to adjust life insurance and annuity portfolios to comply with the rule, according to a discussion of the rule written by a group of officials led by James Polfer, an IRS financial institutions and products specialist.
The rule affects use of Section 817(h) of the Internal Revenue Code, which deals with diversification requirements for life insurance and annuity portfolios.
In the past, IRS officials looked at stocks, bonds and other securities registered with the U.S. Securities and Exchange Commission for sale to the public when assessing portfolio diversity.
The rules governing treatment investments in hedge funds set up as private limited partnerships and other entities not registered with the SEC were not quite as clear, according to Polfer and the other officials on his team.
Analysts at Moore & Bruce L.L.P., Washington, a law firm, pointed out in August 2003, shortly after the IRS released a draft of the new rule in July 2003, that insurers have been drawing IRS attention to Section 817(h) by selling “private place life insurance” policies that help wealthy clients wrap assets managed by the managers of their choice in life insurance policies or annuity contracts.
The IRS now says it will leave an investment in a nonregistered partnership out of assessments of portfolio diversification unless all of the partnership assets are in variable life and variable annuity separate accounts and members of the public can get to the private partnership assets only by buying variable contracts.
The parent of the IRS, the U.S. Treasury Department, says the final rule will “prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments by purchasing the investments through a life insurance or annuity contract.”
