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Legal View

Advisable Wealth Engine’s investing and compliance technology produces a fully compliant legal and regulatory portfolio that eliminates investor control with documentary evidence to prove it.

Murky Waters are Now Clear

On June 30, 2015 the U.S. Tax Court issued a ruling in the Jeffrey T. Webber v. Commissioner of the Internal Revenue case.

The Webber case litigated the failure of Mr. Webber (as the policyowner and tax payer) to adhere to the legal and regulatory requirements necessary for the receipt of his PPVUL (aka AAVUL) policy’s tax-free benefits.

Because of Mr. Webber’s extreme facts and circumstances, the Court provided a well-written and methodical review of the pertinent legal and regulatory history. The Court then identified the boundaries a tax payer and its AAVUL insurance company should follow in order to avoid piercing the policy’s tax shield.

Piercing the Tax Shield:  It’s All About Investor Control 

There are two ways to pierce the tax shield:  1) a portfolio that fails the diversification safe harbor and 2) incidents of portfolio/investment ownership (the investor control doctrine).

Insurance Dedicated Funds (IDFs), Limited Liability Company (LLC)-based portfolios, and advisor-managed insurance company separate accounts all meet the diversification safe harbor requirement. Diversification is an easy test for the IRS: a portfolio is either diversified or it is not.

It is important to know that the IRS did not contest that Mr. Webber’s private equity portfolio was compliant with the diversification laws.  (If the portfolio weren’t properly diversified within the safe harbor, this would have been an easy win for the IRS to collect taxes and penalties from Mr. Webber.)

Investor control is a completely different matter.  Investor control is unique to each policyowner’s facts and circumstances.  It is not structural.

Many practitioners miss the point that these structures only meet the diversification test; they do not, in and of themselves, address investor control.

Nearly all the issued tax rulings and private letter rulings pertaining to variable accounts address whether a variable account owner (VUL or annuities) will violate investor control boundaries; if pierced, taxes are due likely with penalties.

“No arrangement, plan, contract, or agreement”

A “facts and circumstances” realm prevents the IRS from issuing anything other than guidelines. What the Webber ruling accomplished is forming these guidelines into boundaries through the scrutiny of litigation.

These boundaries bring more clarity to what had been murky waters in using AAVUL.

However, on these boundaries sits a clear directive.  There cannot be an “arrangement, plan, contract, or agreement” designed to bypass the boundaries. This was a core violation found in the Webber ruling. In fact, Mr. Webber and his attorney established a workflow that had the appearance of compliance but was a circumvention enabling Mr. Webber to control the portfolio.

It is within this directive that IDFs, LLCs, and advisor separate accounts fail.  There’s nothing within these structures that prevents an investor control circumvention.

Bearing the Burden of Proof

The IRS (with the Webber ruling affirming) says that the policyowner bears the burden in proving that “no arrangement, plan, contract, or agreement” existed.  Structure has nothing to do with this challenge; it has all to do with the presence of policyowner-to-advisor communication, direction, and/or instruction.

The IRS expects the IDF, LLC, and separate account advisor to prove a negative – proving that the advisor did not have communication or otherwise receive direction from the policyowner regarding the AAVUL portfolio.

Proving nothing happened is vastly more difficult from an evidence standpoint than proving that something did happen.  In other words, how does the advisor prove that investor control communication did not exist with the AAVUL portfolio in the presence of normal advisor-client communication?

The IRS Knows What to Look for

From the Webber ruling, the IRS is now fully informed to look for an arrangement, plan, contract, or agreement designed to circumvent the investor control doctrine.

The wealthier the policyowner, the more times the IRS will audit.  Given that an AAVUL policy will typically span decades, a policyowner can expect his or her AAVUL portfolio to be scrutinized multiple times.

The Advisable Wealth Engine’s (AdvisableWE) investing and compliance technology, installed at AAVUL insurance companies, implements the Webber ruling’s boundaries in all respects, but especially those pertaining to investor control.

This technology is unique among all AAVUL portfolio structures (e.g. IDFs, LLCs, advisor separate accounts) in having a repeatable, verifiable, and auditable workflow that is supported by documentary evidence proving that no investor control existed.

Only the AdvisableWE solution provides a complete audit package proving full tax law and regulatory compliance. The tax shield is protected and remains intact.

Executing Webber’s Boundaries Through Technology

Learn about AAVUL’s legal and regulatory foundation and how investing and compliance technology transforms both the AAVUL portfolio (open architecture) and your role (the portfolio’s builder, manager, and monitor).

Download the e-book and the associated infographic.