Despite the best efforts of Congressional Republicans, the ribbon-cutting for the U.S. Consumer Financial Protection Bureau (CFPB) is on schedule for next month. And unlike other Dodd-Frank progeny, this project looks like it’s going to hit the ground running.

The stated mission of the CFPB is to “make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” After the mortgage debacle of the recent financial crisis and stories about predatory practices in the credit card and pay-day loan industries, who can argue with that mission statement?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the fight over Dodd-Frank in Advisor’s Journal, see Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening? (CC 11-95) & Republicans Look to Erode Dodd-Frank (CC 11-75).

Why is This Topic Important to Wealth Managers? This blogticle presents information concerning international regulatory agreements with regards to insurance contracts. The information is provided for those wealth managers who are subject to New York jurisdictional control as it is intended to keep practitioners up to date and current.

The New York State Insurance Department and the Swiss Financial Market Supervisory Authority (FINMA) have announced that the two agencies have executed a memorandum of understanding (MoU) allowing for closer cooperation between the two regulatory bodies.

The agreement was announced yesterday by New York State Insurance Department Superintendent James Wrynn and Dr. Patrick Raaflaub, CEO of FINMA, the government agency responsible for financial regulation in Switzerland.

“Close cooperation between international regulators is among the most effective ways to regulate global financial services. The Insurance Department is proud to execute this agreement with FINMA because it will allow both regulators to closely cooperate to promote the growth of robust, solvent financial services and markets and safeguard the interests of policyholders, creditors, investors and other stakeholders and the financial services industry as a whole,” Superintendent Wrynn said.

“Financial markets and financial institutions are becoming more and more global. International cooperation between regulators and supervisory authorities is key to meeting these developments. Therefore, FINMA is very satisfied to conclude an MoU with the New York State Insurance Department. This is another important step,” Dr. Raaflaub, CEO of FINMA, said.

Under the MoU, either regulator may request assistance from the other, including obtaining information on a regulated person or entity. Either regulator may provide the other with investigative assistance with respect to companies and persons engaged in the business of insurance.

The New York State Insurance Department has already executed MoUs with insurance regulators in 10 other countries, including Bermuda, China, France, Germany, Japan, and the United Kingdom. The Department is in the process of negotiating agreements with regulators in several other countries.

The New York State Insurance Department currently regulates all insurance business transacted in New York State and is the primary regulator for insurance entities domiciled in New York. Entities regulated by the Department have assets under management in excess of $4 trillion.

Later this year, the Insurance Department will merge with the New York State Banking Department to form the New York State Department of Financial Services. The merger is not expected to affect the regulators’ ability to continue to share information about insurance companies.

The Swiss Financial Market Supervisory Authority (FINMA) is an independent supervisory authority responsible for protecting creditors, investors, and policyholders, as well as ensuring the smooth functioning of financial markets. FINMA’s primary objective is to provide protection for market players and the financial system, as well as the system’s reputation. FINMA reports directly to the Swiss parliament.

Tomorrow’s blogticle will continue to discuss relevant topics related to wealth management.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Life insurance policy loans can generally be taken without income tax consequences, but there are circumstances where a “loan” is immediately taxable. We’ve covered situations where a policy is surrendered with a loan outstanding, resulting in taxable income. This article discusses another case where a policy “loan” will be treated as taxable income.

In Frederick D. Todd II et ux. v. Commissioner (T.C. Memo. 2011-123), the Tax Court considered whether a distribution from a welfare benefit fund to a fund participant was a policy loan or a taxable distribution.

For previous coverage of life insurance policies held by welfare benefit funds in Advisor’s Journal, see Deductions for Life Insurance Premium Payments to Welfare Benefit Plan Denied (CC 10-29).

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of welfare benefit funds, see Advisor’s Main Library: B—Welfare Benefit Funds.

Why is This Topic Important to Wealth Managers? Our discussion today is focused on Annuities. There has been a lot of talk recently in the major media about the use of Annuities to meet certain financial planning objectives. We thus continue this discussion which focuses on how wealth managers can take advantage of the situation.

Earlier this week, Advisor’s Journal presented an article discussing a recent Securities Litigation & Consulting Group white paper which captures the sentiments of the anti-annuity press, commenting that, “[a]nnuities stand out as the investment most likely to be unsuitable since in virtually every instance, the investor would have been better served by mutual fund or a portfolio of individual stocks.” See AMAFX: Annuities: They Get No Respect. [1] But the bad press may be unwarranted.

National Underwriter reports variable annuities in 2010 were bullish by virtually all measures. 2010 new sales totaled $136.6 billion, an increase of 10.3% over 2009 sales of $123.9 billion. [2]

New sales surged in the 4th quarter of 2010, reaching $37.1 billion which represents a two-year quarterly high and posting a 17.4% increase over 4th quarter 2009 new sales of $31.6 billion.

Furthermore, year-end assets under management reached a milestone of just over $1.50 trillion, an 11.2% increase over year-end 2009 assets of $1.35 trillion and the highest recorded in almost 20 years of variable annuity asset tracking. This also represents a return to pre-financial crisis asset levels as the previous high water mark of $1.49 trillion was reached in the third quarter of 2007.

Not since 2006 has the change in year-over-year net flow been more positive than the change in sales, and at 15.7% the ratio of net flow to new sales was the highest since 2007; both measures point to improvement in terms of new money vs. exchange fueled sales.

Advisor’s Journal also reported earlier this year that sales of variable annuities (VA) with guaranteed living benefit (GLB) riders continue to grow exponentially, according to LIMRA’s Variable Annuity Guaranteed Living Benefit Election Tracking Survey. The Survey showed a 78 percent increase in assets of VAs with GLB riders, from $292 billion in the fourth quarter of 2008 to $521 billion in the fourth quarter of 2010. See Advanced Markets Advisor FX: Guaranteed Living Benefit Riders Breathe Life into Variable Annuity Sales [3]

As Sterling noted earlier this week, the case studies too represent a positive outlook. He cites to an article by Professor Richard H. Thaler, a University of Chicago professor, which explores one example showing the value through stability and security to the average individual planning for retirement. [4]

The Professor asks readers to assess the financial challenges of identical twins approaching retirement. One twin has a pension that will pay him $4,000 a month for the rest of his life. In contrast, his brother will sustain his retirement income by withdrawals from self-directed accounts. Financial projections confirm this brother has enough assets to fund his retirement through age eighty-five—an age he has a 30 percent chance of reaching. This assumes financial conditions based on historical averages; hardly a fair representation of events during the past decade.

Professor Thaler surmises that, when given the choice between the two retirement options, “nearly everyone” would prefer the guaranteed pension to the uncertainty of self-managed investments.  In sum, according to the Professor, annuities purchasers generally end up with more post-retirement income than their peers.

Tomorrow’s blogticle will present discussion on issues surrounding the wealth management practice.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] Citing Craig McCann  & Kaye Thomas. Securities Litigation and Consulting Group. Annuities. http://www.slcg.com/pdf/workingpapers/Annuities.pdf. Last Accessed 6/20/2011.

[2] Frank O’Connor A Year to Remember. National Underwriter Life & Health. April 4, 2011. http://www.lifeandhealthinsurancenews.com/Issues/2011/April-4th-2011/Pages/A-Year-to-Remember.aspx?page=2. Last Accessed 6/20/2011.

[3] Citing LIMRA. Assets of Variable Annuity with Guaranteed Living Benefit Riders Improve By Almost 80 Percent in Two Years, LIMRA Reports. March 8, 2011. http://www.limra.com/newscenter/NewsArchive/ArchiveDetails.aspx?prid=170. Last Accessed 6/20/2011.

[4] Citing Richard H. Thaler. The Annuity Puzzle. New York Times. June 4, 2011. http://www.nytimes.com/2011/06/05/business/economy/05view.html?_r=2&adxnnl=1&emc=eta1&adxnnlx=1307963257-8N4qBWZGH3BH8+ydWXq9TQ. Last Accessed 6/20/2011.

Although the federal estate tax is getting all the attention nowadays, a bulk of death tax activity affecting Americans is happening at the state level.

Only a minority of states (twenty-two plus D.C) currently have a “death tax”—referring collectively to estate and inheritance taxes. And a number of those states recently raised their exemption amount to exclude a large majority of their residents from the tax. One state—Ohio—is on the verge of repealing its estate tax altogether.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Obama’s tax agreement, including its estate tax provisions, in Advisor’s Journal, see Obama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112) and Obama Tax Agreement Passed by House (CC 10-117).

Why is This Topic Important to Wealth Managers? This blogticle discusses a situation that may disqualify a Section1035 exchange. Even though wealth managers may be familiar with the 1035 exchange generally, it is important to discuss the details of particular situations which may affect the tax treatment of certain life insurance and annuity contract exchanges.

If a Taxpayer receives a check from a life insurance company under a non-qualified annuity contract, does the endorsement of the check to a second company as consideration for a second annuity contract qualify as a tax-free exchange under § 1035(a)(3) of the Internal Revenue Code?

Illustration: A, an individual, owned a non-qualified annuity contract issued by IC1, a life insurance company. In 2011, A requested that IC1 issue directly to IC2, another life insurance company, a check as consideration for a new annuity contract to be issued by IC2. A intended the transaction to be treated as a tax-free exchange under § 1035. IC1 refused to do so and, instead, issued a check to A. A did not deposit the check, but instead endorsed it to IC2 as consideration for a new annuity contract. What result?

Generally, gross income includes any amount received as an annuity under an annuity contract. [1] The Code though provides that no gain or loss is recognized on the exchange of an annuity contract for another annuity contract.[2]

As a general matter Section however Section 1035 provides for the non-recognition treatment for taxpayers who have “merely exchanged an [annuity contract] for another better suited to their needs and who have not actually realized gain.”[3] Under, the Treasury Regulations the contracts exchanged must relate to the same insured, and the obligee or obligees under the contract received in the exchange must be the same as those under the original contract.[4]

Certain Revenue Rulings hold that exchanges under Section 1035 are allowed when an insurance contract or annuity, issued by one insurance company, is assigned to a second insurance company in consideration of the issuance of a new annuity contract.[5]

Nevertheless, in the above illustration, there was no actual exchange of annuity contracts; nor did A assign the IC1 contract to IC2; nor was there a direct transfer from IC1 to IC2 of the cash value of the old contract in exchange for the new contract. Instead, IC1 disbursed a check to A, which A, in turn, endorsed to IC2 as consideration for a new contract.

Neither § 1035 nor the regulations make any special provision for the purchase of an annuity contract with amounts distributed to the policyholder under another contract. Accordingly, the amount that A received from IC1 under the first annuity contract is taxable in 2011 to the extent set forth in § 72(e).

Held: If a Taxpayer receives a check from a life insurance company under a non-qualified annuity contract, the endorsement of the check to a second company as consideration for a second annuity contract does not qualify as a tax-free exchange under § 1035(a)(3). Instead, the amount received is taxable to the extent set forth in § 72(e).[6]

Tomorrow’s blogticle will continue to discuss relevant issues related to life insurance and wealth management.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] See IRC Sec. 72(a).

[2] IRC Sec. 1035(a)(3).

[3] H. Rep. 1337, 83d Cong., 2d Sess. 81 (1954).

[4] See Treas. Reg. § 1.1035-1.

[5] See Rev. Rul. 72-358, 1972-2 C.B. 473; Rev. Rul. 2002-75, 2002-2 C.B. 812.

[6] See Rev. Rul. 2007-24.

We’re all aware that annuities get a bad rap in the media: High fees, high-pressure sales, and unsuitability are the predominating themes.

A recent Securities Litigation & Consulting Group white paper captures the sentiments of the anti-annuity press, commenting that, “[a]nnuities stand out as the investment most likely to be unsuitable since in virtually every instance, the investor would have been better served by mutual fund or a portfolio of individual stocks.”

Annuities are neither inherently “good” nor “bad.” It follows that rational evaluation of annuities can’t be conducted in a bubble—it must focus on their application.  Herein lays their value and the coup de grâce the industry and individual producers have been awaiting.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of annuities in Advisor’s Journal, see How Much to Allocate to Annuities: A Critical Analysis (CC 11-109).

For in-depth analysis of the income taxation of annuities, see Advisor’s Main Library: Section 19.2 Income Taxation of Annuities.

Why is this Topic Important to Wealth Managers? This blogticle reviews the general requirements for the deductibility of donations for federal income tax purposes. Our goal is to provide information for wealth mangers to stay current on relevant topics including charitable contributions.

The Internal Revenue Code allows for deductions for federal income tax purposes of contributions or gifts made to or for the use of an organization that qualifies as a federally tax-exempt organization. [1]

For a charitable contribution to be deductible, the charity must receive some benefit from the donated property; [2] and  the donor cannot expect to receive some economic benefit (aside from the tax deduction) from the charity in return for the donation. [3]

However, a charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution. [4]

Charitable contributions of $250 or more (whether in cash or property) generally must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. [5]

For contributions of property other than money, the taxpayer is generally required to maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property. The value need not be stated on the receipt. [6]

A deduction for a contribution of property with a claimed value exceeding $500 will generally be denied to any individual, partnership, or corporation that fails to satisfy the property description and appraisal requirements. [7]

However, there are two exceptions to the general rule. Under the first exception, the appraisal requirements, for property valued at more than $5,000 and at more than $500,000, do not apply to readily valued property, such as cash and publicly traded securities. Under the second exception, the general rule does not apply if it is shown that the failure to meet the requirements is due to reasonable cause and not to willful neglect. [8]

As a general matter, in order for contributions to be deductible, the organization must qualify at the time of the contribution. Thus, it is the responsibility of an organization receiving contributions to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements under the Code in order for grantors and contributors to have the assurance that their contributions at the time made are deductible.

Generally, Publication 78 lists organizations that have received a ruling or determination letter from the IRS stating that contributions by grantors or contributors to the listed organization (or to the listed central (or parent) organization and those local (or subordinate) units covered by the group exemption letter) are deductible as provided in § 170.

Moreover the law has been interpreted so that grantors and contributors may generally rely on an organization’s ruling that the organization is described until the IRS publishes notice of a change of status (for example, in the Internal Revenue Bulletin or Publication 78), unless the grantor or contributor was responsible for, or aware of, the act or failure to act that results in the organization’s loss of public charity status. [9]

Tomorrow’s blogticle will discuss insurance topics related to estate and gift tax planning.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] See IRC Sec. 170.

[2] See Winthrop v. Meisels, 180 F.Supp. 29 (DC NY 1959), aff’d 281 F.2d 694 (2d Cir. 1960).

[3] See Stubbs v. U.S., 70-2 USTC ¶9468 (9th Cir.), cert. den. 400 U.S. 1009 (1971).

[4] IRC Sec. 170(f)(17), as added by PPA 2006.

[5] IRC Sec. 170(f)(8)(A).

[6] Treas. Reg. §1.170A-13(b)(1).

[7] IRC Sec. 170(f)(11)(A)(i).

[8] IRC Sec. 170(f)(11)(A)(ii).

[9] See generally Temporary Regulations §§ 1.170A-9T(f)(5)(ii) and 1.509(a)-3T(e)(2), 73 Fed. Reg. 52,528 (Sept. 9, 2008).

Failure to file an FBAR (Report of Foreign Bank and Financial Accounts) can result in penalties of up to $500,000 and 10 years imprisonment, so it’s essential for you and your clients with foreign financial accounts (FFAs) to get a handle on the Treasury’s escalating FBAR rules. But deciphering the FBAR rules hasn’t always been a straightforward proposition.

Up until recently, the FBAR requirements were shrouded in mystery; but with the release of final FBAR regulations earlier this year, the rules are just starting to make sense. Further important clarifications also were made by the IRS at a June 1 webcast.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the FBAR in Advisor’s Journal, see Do Your Clients’ International Assets Create Criminal Tax Exposure? (CC 11-73).

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the Affordable Care Act with regards to the establishment of state health insurance exchanges. The information is provided to wealth managers to keep them informed on the health insurance law changes which will begin to appear so that they may better prepare clients.

New York Governor Andrew M. Cuomo announced earlier this week that he has submitted a Governor’s program bill that would establish a new Health Benefit Exchange in order to comply with the Affordable Care Act passed by Congress and signed into law by President Barack Obama in 2010.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act are collectively referred to as the Affordable Care Act, and include a number of policies intended to help physicians, hospitals, and other caregivers improve the safety and quality of patient care and make health care more affordable. The idea is by focusing on the needs of patients and linking payments to outcomes, delivery system reforms should help improve the health of individuals and communities and slow national health care cost growth. [1]

New York has made the decision to operate its own exchange, rather than have the federal government operate one for the state, given the complexity and diversity of the insurance market in New York.

“This legislation would fulfill New York’s commitment to the federal government to set up a health benefit exchange that will enhance access to affordable quality health care for all New Yorkers,” Governor Cuomo said. “This is a dynamic and flexible proposal that will protect consumers and help bring down the cost of health care for families, businesses, and taxpayers.”

The purpose of the proposed legislation is to establish a single Exchange in New York – a centralized, customer-service oriented marketplace where individuals and small groups will be able to purchase qualified health plans, receive eligibility and subsidy determinations, and be enrolled in a range of coverage options, including public health coverage programs.

The Exchange will make available health plans, including certain qualified dental plans, to individuals and employers beginning on or before January 1, 2014. Under this proposed legislation, the Exchange will establish the minimum requirements an insurer shall meet to be considered for participation in the Exchange and will implement procedures for the certification, recertification, and decertification of health plans as qualified health plans. The Exchange will also assign ratings to qualified health plans offered through the Exchange on the basis of relative quality and price, in accordance with the Affordable Care Act.

In addition, the Exchange will include a Small Business Health Options Program (SHOP), which will assist small employers in facilitating the enrollment of their employees in qualified health plans offered in the group market.

While the Federal law requires each Exchange to be “self-sustaining” by January 1, 2015, federal funds will support the planning, implementation, and operation of the Exchange through December 2014. New York has already been selected to receive funding under an Early Innovator Grant ($27 million) and an Exchange Planning Grant ($1 million).

The bill also provides critical protections meant to assist individuals in using the Exchange. For example, the bill provides that the Exchange will operate a toll-free telephone line to assist consumers and an Internet website containing standardized comparative information on qualified health plans. The website will also feature a calculator allowing individuals to determine the actual cost of coverage. The bill also requires the Exchange to establish a program to award grants to entities to serve as “navigators” to help educate consumers and facilitate enrollment.

With the enactment of this legislation, assuming other applicable criteria are met, New York will qualify to apply for additional federal funding to support Exchange planning and establishment through December 31, 2014.

Next week’s blogticles will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] See Public Law 111-148; Pub. L. 111-152.