Ultra-affluent clients often utilize Private Placement Life Insurance and Annuity accounts to shield traditional and alternative asset class investments from current taxation.
These accounts can:
- Optimize after-tax investment returns.
- Eliminate K-1s reporting.
- Enhance creditor protection.
- Increase charitable bequests.
- Reduce the reporting requirements for foreign financial institutions, and/or protect foreign non-grantor trust assets from DNI.
Under most reasonable assumption sets, the incremental cost of a Private Placement Life Insurance or Annuity account is substantially lower than the cost of income taxes that would otherwise be payable on investment gains.
Here are the key points for a PPVA and PPVUL:
Private Placement Variable Annuities (“PPVA”)
- PPVA allows individuals to maintain full ownership of assets throughout their lifetimes, while deferring the income taxation of investment gains.
- PPVA has no upfront commission loads or premium tax charges, and assets can remain invested until a client choses to access those assets.
- IRS Section 72 specifically authorizes annuities (including PPVA).
- PPVA is not dependent upon an individual’s health status.
- Withdrawals from a PPVA account are taxed on a last-in, first-out basis (with the taxable gain not recognized until all that remains is the cost basis), and there’s a 10% excise tax on gains for withdrawals taken before the age of 59 ½.
- The client does not get K-1s for assets inside of PPVA accounts.
Private Placement Variable Universal Life (“PPVUL”)
- Private Placement life insurance is more complicated than PPVA but has better tax attributes.
- With PPVUL accounts, the client must take an insurance physical and acquire institutionally priced life insurance.
- The assets invested inside of PPVUL accounts grow tax deferred.
- When the insured dies, the accumulated gains along with some nominal life insurance benefit are paid out to the beneficiaries of the policies, income tax free.
- If the policy owner wants to access the accumulated investment value inside of the policy during the insured’s life, he or she can do so up to about 80 % of the value. The cost basis is returned first via a withdrawal, and any gains are lent back to the policy owner via a low-cost (or no-cost) policy loan.
- PPVUL accounts offer the opportunity for significant income and tax-efficient wealth transfer planning.