Inside build-up in variable annuity contract used to fund secular trust not taxable under section 72(u)

Article Abstract:

The IRS has issued letter rulings which allow the buildup of employee-grantor trusts using annuity contracts to be tax free. This ruling circumvents section 72(u) of the IRC, which would otherwise tax the use of annuity contracts to build up trust funds. The IRS asserts that such trusts are tax free because they are held by natural persons, in this case the individual employee, rather than corporations. Employee-grantor trusts have become a popular means for employers to fund an employee's deferred compensation. Employers may also take a deduction equal to their contribution.

Grantor trusts, Variable annuities

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DOL issues guidance on annuity purchases for terminating participants

Article Abstract:

The US Department of Labor has set forth guidelines for retirement plan administrators charged with selection of annuities, and the guidance emphasizes the caution to be exercised with terminating plans that will revert back to the employer. Plan fiduciaries are required to make a thorough and objective search to determine the creditworthiness of the annuity provider. Liability risks, assets and diversification should all be researched. The annuity need not be the safest on the market if a small loss in security would substantially reduce the price.

Investments, Pension funds

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IRS approves master secular trust arrangement holding group annuity contract on behalf of natural persons

Article Abstract:

IRS Private Letter Ruling 9810015 is a good reference for employers wishing to establish nonqualified retirement benefits in the form of secular trusts. Employees' after tax compensation may be used to fund such trusts which the IRS favorably ruled would be treated as trusts acting for plan participants holding annuity contracts. This interpretation allows ordinary income treatment on trust income to be avoided under IRC section 72(u).

Contracts, Trusts and trustees, Trustees, Trusts (Law), Retirement benefits

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