With the aging of the population and increasing life expectancy, individuals have become increasingly concerned about outliving their assets. While the sale of variable annuities has continued to increase, most purchasers of deferred annuities do not annuitize their benefits under the annuity options available to them. Moreover, minimum withdrawal benefits ("GMWB"), which have become a feature in a number of deferred annuities, do not receive favorable tax treatment, i.e., to the extent there is income in the annuity contract, each GMWB is fully taxed at ordinary income rates.
To address these issues, a number of insurers have begun to offer contingent deferred annuities that have been labeled "synthetic" annuities. A "synthetic" annuity is, in effect, an arrangement that guarantees the purchaser a guaranteed stream of income for life that is based on the returns of investment funds that are not owned by the insurance company. If the assets in the investment funds are depleted by certain permissible causes, the insurance company guarantees the stream of payments for the life of the purchaser or the joint lives of the purchaser and spouse. Until recently, there has been great uncertainty as to the tax treatment of these arrangements.
Jorden Burt has been a leader in helping its clients interested in developing "synthetic" annuity products to design such products for the qualified and nonqualified markets and to address the regulatory requirements of the SEC, DOL, state insurance departments and IRS. Because of the novel features of the "synthetic" annuity, both the insurance company and policyholder tax treatment of such arrangements had been unclear.
The IRS recently issued two PLRs secured by Jorden Burt. One PLR deals with life insurance company tax issues and the other deals with policyholder tax issues. Although PLRs can only be relied upon by the taxpayer that obtains the PLR, they are useful in ascertaining the views of the IRS with respect to the subject matter of the PLR.
The most significant holding in both PLRs is that the annuity issued by the insurance company that guarantees the lifetime income stream if the investment fund is depleted will be considered an annuity for tax purposes by the IRS and that payments under the contract will be treated as "amounts received as an annuity." The policyholder PLR also deals with the tax treatment of distributions from the investment fund, namely as dividends and capital gains distributions, and redemption of fund shares.