Advanced Underwriting Consultants

Question of the Day – June 24

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client wants to have his single member LLC own an annuity contract on his life.  Is that allowed?

Answer: Yes, subject to the rules an insurance company might impose.  However, the inside buildup of the annuity is probably taxable under the non-natural ownership rules.

Here’s what Section 72 of the Tax Code says about annuity ownership by a non-natural owner:

(u) Treatment of annuity contracts not held by natural persons

(1) In general

If any annuity contract is held by a person who is not a

natural person –

(A) such contract shall not be treated as an annuity contract

for purposes of this subtitle (other than subchapter L), and

(B) the income on the contract for any taxable year of the

policyholder shall be treated as ordinary income received or

accrued by the owner during such taxable year.

For purposes of this paragraph, holding by a trust or other

entity as an agent for a natural person shall not be taken into

account.

There are a few private letter rulings from the IRS that spell out when trusts were considered agents of a natural person.  There are NO IRS letter rulings of which we are aware that talk about the possibility of an LLC being an agent for the owner or owners of the LLC.  While we can make a plausible argument in favor of the idea that the LLC is an agent of its owners for the annuity tax rules, it is only an argument—it’s not reliable authority.

Therefore, the safest approach is to assume the non-natural ownership rules will apply in the case of a single member LLC.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.