The Internal Revenue Services has now issued a total of 18 private letter rulings concerning payment of asset-based fees for fee-based annuities, and Pacific Life has one of the letter rulings.
The IRS letter rulings will give the 18 recipients, and only those companies, use annuity assets to pay fees to the annuity holders’ advisors directly, without generating extra tax bills for the annuity holders.
As of Nov. 8, the IRS had posted just nine letter rules.
(Related: IRS Posts Annuity Fee Letter Rulings)
The agency posted eight letters Nov. 15, and a ninth letter Nov. 29.
Letter Ruling Basics
A “private letter ruling” is a document that shows how one IRS official has applied the tax rules to one taxpayer’s situation.
Life insurers who like the looks of the new letter rulings can use the text when writing requests for their own letter rulings.
But, if life insurers want to help annuity buyers keep advisory fees out of taxable income, they have to apply for their own letter rulings. They can’t apply Pacific Life’s private letter ruling to their own advisory fee payment mechanisms.
New Letter Ruling Details
Pacific Life announced Wednesday that it, like the letter ruling recipients that had talked about their letters on or before Nov. 8, could use its ruling to allow for advisory fees to be withdrawn from an annuity contract held outside of a retirement account without creating a taxable event.
Like the other annuity issuers with letter rulings, Pacific Life must hold annual fees to 1.5% of the annuity’s cash value to qualify to use the new IRS interpretation.
Pacific Life noted that, in 1993, the IRS had ruled against issuers proposing similar annuity advisor payment arrangements.
The list of annuity issuers that have announced receiving advisory fee letter rulings also includes Lincoln Financial, Nationwide Mutual, Great American Life, and Allianz Life.
Many large financial services companies control two or more separate life insurance companies. It’s possible that, in some cases, two or more companies in the same corporate family have asked the IRS for advisory fee letter rulings. That means the number of separate corporate families with advisory fee letter rulings could still turn out to be less than 18.
Doug Mantelli,vice president of registered investment adviser (RIA) strategy in Pacific Life’s retirement solutions division, said in the Pacific Life letter ruling announcement that annuity issuers need to find ways to support retirees’ demand for protected lifetime income.
“This ruling will smooth the path for RIAs and fee-based advisors to include non-qualified annuities in retirees’ portfolios and to meet the overall needs of their clients,” Mantelli said.
— Read IRS Rules for Nationwide and Lincoln on Annuity Advisory Fees, on ThinkAdvisor.