Recent IRS Private Letter Ruling on Post-Death Tax Free Annuity Exchanges

The IRS recently issued a private letter ruling with regard to the income tax free exchange of annuity contracts under Section 1035 of the Internal Revenue Code. In PLR 201330016, the IRS approved the tax-free exchange by a post-death beneficiary of multiple annuity contracts (five contracts) for one new contract issued by a different company since the new contract did not extend the payout period under the original contracts. The result is not a watermark event (many tax advisors thought that 1035 exchange treatment was available to post-death beneficiaries of such contracts), but it does provide annuitants and their advisors with comfort regarding the use of the technique.

While a PLR can only be relied upon by the taxpayer requesting the ruling (and thus it has no precedential value), it does provide insight into the IRS’s thinking on this issue. Advisors and their clients should be aware of the ruling as it could be a platform for flexible planning as well as potential abuse (such as churning contracts).

For more information on planning, contact Preti Flaherty estate planning attorney Richard Ploss and for concerns about unsuitable or improper annuities-related advice contact Preti Flaherty attorney Sigmund Schutz.

Former Top New Hampshire Securities Regulator, Mark Connolly, Available for Securities Consulting

For several years now Mark Connolly, former New Hampshire Director of Securities Regulation, has operated a registered investment advisory firm, New Castle Investment Advisors, LLC in Portsmouth, New Hampshire. 

Mark served as Director Securities Regulation from 2002 through 2010, where he led the agency with responsibility for securites regulation in New Hampshire, including enforcement and oversight of a thirty-five million dollar revenue budget; regulatory authority over 50,000 licensed agents and investment advisors and 1200 broker-dealers.  Mark served on the Board of the North American Securities Administrators Association, in several leadership roles at NASAA, and received that organization's Award for Enforcement in 2007.

On Mark's watch, New Hampshire became the first state to legislatively adopt provisions based on NASAA's Model Rule on the Use of Senior Certifications and Professional Designations.  The model rule prohibits the misleading use of senior and retiree designations while also providing a means by which a securities administrator may recognize the use of certain designations conferred by an accredited organization.  The model rule addresses the growing use of financial designations or certifications that ostensibly convey expertise in advising seniors and retirees. The use of a senior designation by salespersons, whether registered or not, confers an impression that the salesperson has special qualifications or specialized education in addressing the needs of senior citizens or retirees, particular areas of finance, financial planning, estate planning, or investing.

Mark left the agency in the wake of the Financial Resources Mortgage ponzi scheme.  He has answered questions about his reasons for resigning as Director in an interview published in the New Hampshire Business Review, and wrote a book, Cover-Up, on the ponzi scheme as he experienced it as a regulator.

His practice at New Castle includes portfolio management as well as expert consulting services for securities-related matters, including supervision, suitability, due diligence, and securities regulatory issues.

FINRA Dealing With Repercussions From Undisclosed Arbitrator Misconduct

According to Reuters, the Financial Industry Regulatory Authority (FINRA), Wall-Street’s industry-funded watchdog, is in high-gear to ensure it vets the backgrounds of its arbitrators before appointing them to cases. This, after an incident last June where an investor who lost a $1.4 million case against Goldman Sachs asked a federal court to overturn the ruling. The reason: he alleged that the arbitrator did not fully disclose his involvement in a criminal proceeding. A judge for the U.S. District Court for the Eastern District of Pennsylvania agreed, throwing out the arbitration ruling in a decision focusing on the arbitrator's misconduct.

In response, FINRA is running Google searches on arbitrators immediately before appointing them to cases. It is also gearing up to run yearly background checks on its 6,500 arbitrators, who were previously put through the process only when they applied for the job.

The goal is to prevent future arbitration rulings from being invalidated due to problems with arbitrators, including last-minute details that undisclosed by arbitrators. These “details” could include everything from a conflict of interest triggered by an employment change, or even an arrest.

This recent revelation also added fuel to the fire for those who oppose the current practice of mandatory arbitration in disputes between brokers and investors. This practice, which investors agree to when they open a brokerage account, bars them from bringing an action in court.