Private annuities may lose tax break

The Internal Revenue Service wants to change the rules on exchanging property for a private annuity. The result could be the loss of a key tax break for many people with private annuities.

For years, people have transferred property that has appreciated in value to someone likely to inherit it. In exchange, the person receiving the property makes an unsecured promise to make periodic payments for the rest of the life of the giver, thus creating a private annuity.

It used to be that the IRS allowed the gain from the private annuity to be taxed over the lifetime of the person who is receiving it, called the annuitant. Now the IRS wants to tax the annuitant on the gain in value of the property the moment it is given away.

If the IRS goes through with this proposed rule change, the use of a private annuity to transfer wealth between generations will lose all its allure for many taxpayers. The IRS wants the new rule to apply across-the-board to both private and commercial annuities.

-- Paul Rudoy,
Horovitz, Rudoy & Roteman,
pkrudoy@hrrcpa.com

IBM leads way on pension advice

By now, most employers know that the Pension Protection Act of 2006 enables them to offer financial advice to employees with 401(k) plans. But they may not know that employers who provide this advice must follow strict rules.

Before passage of the new law, employers refrained from offering employees advice on how to invest, fearing that if investments went sour, employees would sue. The result was that many employees either invested foolishly, or just let their 401(k) money sit in their account.

The new pension law now protects employers from these lawsuits, but only if rigorous conditions are met. For example, the employer must prudently select and review the credentials of the financial advisers it provides to employees. The employer must also make sure that the advisers' fees are reasonable. If the advisers use a computerized portfolio model, an independent party must certify that the model works and is not biased in favor of any investment.

IBM has taken an early lead in providing employees access to investment advice. It recently announced a new benefit for their employees, "IBM Money Smart," that includes educational seminars, online tools and one-on-one personal planning sessions with independent financial planners.

-- Rick Pierchalski,
BPU Investment Management,
rpierchalski@bpuinvestments.com