The ruling could also allow more fee-based advisors and RIAs to incorporate insurance and annuity products into their clients’ financial plans, said Hawley.
“In the conversations we’ve had with advisors over the last three days, we’ve heard that this is a huge friction point that’s being relieved,” said Hawley. “Advisors are telling us that this is something that will allow them to use annuities more often.”
Seven other insurance carriers also requested the IRS guidance. Rob Fishbein, vice president in Prudential tax and legal department, noted, "The IRS was willing to rule favorably only if we limited the facts of the ruling request to situations where fees do not exceed 1.5% of the annuity contract’s cash value and relate solely to services provided for the annuity contract. The IRS asked for these elements to ensure that no contract value other than that for adviser fees is sent out of the contract tax free.
"Of course, an annuity issuer is not a party to the agreement between the advisor and the policyholder, and there may be fee arrangements that exceed the 1.5% threshold," Fishbein continued. "But the IRS ruling does not address those arrangements – it only confirms the favorable tax treatment for arrangements that meet the 1.5% cap. In our experience, most fee arrangements would meet the cap, so we were happy to limit the facts of our ruling request in this manner. Even with this limitation, we think the ruling covers virtually all of the fee-based arrangements involving our non-qualified annuity products."
However, fees associated with investment advisory arrangements other than for annuity contracts "have no bearing on the annuity contract fee arrangement," Fishbein said. "Each should reflect the investment advisory support appropriate for the separate arrangement."