Who could have predicted that the time would come when people would worry about the uncertainty of the "when" of death, about living too long, and that a federal taxing authority, the Internal Revenue Service, would act "kindly" on tax treatment?
But contingent annuities have given rise to that anomaly. Also called synthetic annuities, these deferred annuity contracts start income payments when a named contingency, or future event, occurs. The products guarantee a specified stream of withdrawals from the measuring assets, followed by a stream of payments for life when those assets are depleted by certain permissible causes.
The promise that contingent annuities have held for addressing the uncertainty of outliving one's assets have hung partially in the balance due to lack of clarification of their tax treatment.
Providing a guaranteed income stream would lose much of its luster if it entailed the loss of certain current beneficial tax treatment of the insured's investments. Well, it doesn't (entail that loss); that is the latest and only good news for contingent annuities. In November, Phoenix, the initial issuer of a contingent annuity (the Phoenix Guaranteed Income Edge income guarantee), amended its registration statement to say that:
"The Internal Revenue Service has issued rulings indicating that Income Edge is an annuity contract under the Internal Revenue Code. In addition, the Internal Revenue Service has also issued rulings concerning the tax treatment relative to assets in the Account. These rulings provide, in substance, that the tax treatment of the Account is unaffected by the existence of Income Edge."
That statement has been interpreted to mean that the tax treatment of transactions involving the mutual fund or private managed account investments supporting the annuities' promises, including redemptions, dispositions and distributions of those investments, will be unchanged by the existence of the related contingent annuity. The private letter ruling on this is not yet publicly available, so additional details on tax treatment must await the letter's release and review by qualified tax lawyers. Hence, this article is limited to pointing out that the IRS ruling is good news in an otherwise uncertain horizon for these products.
There is another unwelcome certainty. While the IRS found these products to be annuities for tax purposes, the Office of the General Counsel, New York State Insurance Department, eliminated another uncertainty, albeit not in an affirmative manner.
