IRS Treats Adviser’s Fee Under Adviser Annuities and Allows Equal Billing to an Adviser Life Insurance Contract
Legal Adviser :1 Annuities and Equal Life Insurance Now
A recent private letter ruling (No. 202341002) from the IRS addresses the tax implications of paying an adviser advisory fees derived from a “adviser life insurance contract.”
The letter ruling specifically addressed the question of whether paying such fees out of a life insurance contract directly would be regarded as a distribution from the life insurance contract.
The letter ruling and the other nineteen that the IRS has issued regarding “adviser annuities” are nearly identical. In keeping with those, the recent letter ruling determined that the fees were not considered “amounts received” because they were an essential component of the life insurance contract’s functioning not a distribution from the life insurance contract, as defined by Internal Revenue Code section 72.
The representations in the letter ruling were identical to those in 17 of the “adviser annuity” rulings:
- The owner of the life insurance contract will approve the use of the contract’s cash value to pay the investment advisory fees.
- The adviser will only be paid for investment advice related to the life insurance contract; no other services will be covered by the fees.
- The entire cost will be the responsibility of the life insurance contract, and it will be paid to the adviser directly rather than the owner of the life insurance contract.
- The life insurance contract will not be sold to the adviser for a commission.
- The advisory fees earned shall not surpass a yearly total of 1.5% of the cash value of the life insurance policy.
Even with this positive development, only the taxpayers who receive letter rulings can rely on them. Nonetheless, the decisions do represent the IRS’s view on how advisory fees from annuities or life insurance contracts ought to be handled in light of the relevant facts.
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