Private Placement Insurance

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.

Conclusion:

PPVA and PPVUL may be beneficial for tax-sensitive investors, especially those seeking to invest in hedge funds or funds of funds.

While PPVUL is more complicated to implement, there is a greater appeal from the income tax-free access to the accumulated value within the account during the lifetime of the insured and an income tax-free insurance benefit at the insured’s death.