The IRS recently published a Private Letter ruling (No. 202341002) addressing the tax treatment of consulting fees paid to an advisor from an “adviser life insurance contract.” Specifically, the letter ruling addressed whether payment of these fees directly from the life insurance contract would be treated as a distribution from the life insurance contract.
The letter ruling is largely consistent with 19 other rulings the IRS has issued regarding “adviser annuities.” Consistent with this, the recent letter ruling held that the fee was an integral part of the operation of the life insurance contract and, as such, was not treated as “amounts received” under Section 72 of the Internal Revenue Code, i.e., not an amount received. Distribution from a life insurance contract.
The letter’s ruling included the same statements contained in 17 provisions of the “Counsel’s Pension”:
- The life insurance contract owner authorizes payment of investment advisory fees from the cash value of the life insurance contract.
- The fee will compensate the Advisor only for investment advice in connection with the life insurance contract and not for any other service.
- The life insurance contract will be solely responsible for paying the full fees, which will be paid directly to the advisor and not to the life insurance contract holder.
- The advisor will not charge a commission for the sale of a life insurance contract.
- The advisory fee received will not exceed an annual amount of 1.5% of the cash value of the life insurance contract.
Despite this positive development, the letter provisions can only be relied upon by the taxpayers who receive them. However, the rulings reflect the IRS’s thinking about how to treat advisory fees from annuities or life insurance contracts, given the facts of the rulings. Taxpayers should evaluate risks before relying on judgments, rather than obtaining their own judgment.