Tax Planning

Tax planning with personal placement life insurance coverage within the household workplace

For 60 years or more, the estate planners community (tax attorneys, accounting firms, financial planning firms, etc.) has been using their clients.

The policies offer both an exceptional level of tax-privileged savings based on the fact that the internal top-up of the policies is tax-free (or deferred until repurchase or expiry) and the death benefit income is income tax-free and, if properly planned, inheritance – and free of gift taxes. As such, these policies create an excellent source for paying inheritance and other transfer taxes, as well as for increasing family income and wealth after the death of the older generation. It is not uncommon to refer to the life insurance policy as a tool that enables customers to pay transfer tax for their family through the use of discounted dollars. The life insurance policy premiums provide income and inheritance tax-free dollars to the family unit by being owned by an irrevocable life insurance trust (which lends money to the estate or purchases illiquid assets from the estate) and making taxes payable to it, rather than giving the customer a declining cash fund builds up to provide the full amount of taxable capital to pay taxes (or fund a trust with 100 cents on the dollar to pay taxes).

Life insurance has traditionally been used to provide a source of income for their customers when the main breadwinner dies. Lately the industry has evolved as has the planning process. It is far more common today for us to plan with variable life insurance policies for entire segments of the upper income and high net worth consumers. High-net-worth (HNW) and ultra-high-net-worth customers today are much more interested in acquiring life insurance as an asset class that can offer low-taxed income distributions as well as income and inheritance tax-free death benefits to meet their inheritance tax and wealth preservation goals . This is the result of an insurance strategy that now makes it possible, despite the recently enacted SECURE Act, to increase a larger amount of the accumulated present value and accumulate taxes deferred indefinitely.

Recent changes to Section 7702 and the massive attack the UHNW client is facing due to the current proposed tax plans have made private placement life insurance even more efficient than it was last year. Equally important, PPLI offers better prices and lower costs as participants have better access to health care, which the insurer in turn passes on to the insured. These factors, in addition to significantly lower institutional commissions than retail commissions, result in greater cash value build-up, and unlike their retail counterparts, there are no early withdrawal surcharge penalties.

Such a strategy also gives insured persons access to institutional hedge funds instead of traditional mutual funds. The combination of hedge funds, venture capital and stock markets in a tax-privileged insurance company gives the iVersed a significant advantage. What makes it even more meaningful is that after the death of the insured person, the death benefit is passed from one generation to the next, 100% income and inheritance tax free, which when properly set up in an irrevocable life insurance trust, offers the family the most tax efficient transactions and Investment income. It can be viewed as a Roth IRA on steroids.

Life insurance can now also be viewed as an asset class that can bring the insured and their beneficiaries a tax-deductible significant cash flow as an advantage to secure their livelihood. For example, it can provide tax-free leveraged distributions to meet care needs directly from the death benefit of a life insurance policy. In addition, the PPLI policy is often used in single or multi-family offices to allow income tax deferral in the event of lifelong growth, as well as access to cash values ​​via a buyback and borrowing strategy that enables a tax-free transfer of the death benefit into an immediate or deferred pension. If the distributions of an immediate pension are used to pay care premiums directly to an insurer, the exclusion rate is 100%.

Implementing a PPLI strategy offers the insured policyholder and beneficiaries significant tax and other benefits. However, because PPLI is a security and requires a private placement memorandum that requires the coordinated efforts of a tax attorney, auditor, and experienced insurance professional to properly structure the strategy and tailor it to clients’ specific needs, it is costly to establish. high. From an economic point of view, the strategy only makes sense if the insurance premiums and / or assets transferred to the policy exceed certain thresholds. If the scope is sufficient, however, it makes sense to resort to a PPLI, be it from a boutique specialty insurer or from several of the major insurers, as it offers the insurance professional the opportunity to obtain institutional life insurance for their customers with lower costs and fees than on a traditional retail basis. Additionally, it is a good general rule to review any current retail award greater than $ 500,000 to ensure that customers are receiving the most tax efficient and affordable death benefit in US dollars in exchange for the award they are currently paying .

Either way, the newfound opportunity to acquire this type of investment under a life insurance policy or an annuity contract and thereby achieve customer goals and objectives has made it easier to fund large dollar amounts in these types of policies. The flourishing of the market for these types of policies and structures has resulted in the introduction of a wide variety of products and stimulated the variable life insurance market for private placements. Given the timing of Section 7702 and the SECURE Act, it is clear that the government has sent a strong signal that life insurance is preferred to the traditional IRA as the right tool to shield tax-deferred growth from income and / or capital gains taxes indefinitely and then in the event of death, and let the capital and profits pass to the next generation with 100% income and inheritance tax free if it is set up correctly.

The growth of the PPLI market and the demand for new investment instruments have enabled a significant expansion of the range of this type of product in the family office area and created an independent and often misunderstood asset class today. The acceptance of these policies in the market has created a solid and stable basis for growth. The PPLI marketplace has meanwhile developed into an industry segment suitable for the HNW and the UHNW individual marketplace, which is often used by single-family and multi-family houses in order to achieve the greatest possible value for their families across the country. Private placement life insurances add flexibility to the design, pricing and asset management offerings of a variable universal life insurance product. Each transaction can be negotiated individually and tailored to the respective investor. The tax advantages it offers policyholders are available, if at all, from few other investment vehicles, especially since they arise without complex trust structures.

What really sets PPLI apart from more traditional life insurance policies is the ability to customize the investment component of the contract. Family office managers take advantage of the fact that PPLI guidelines provide access to sophisticated and alternative asset classes and strategies such as hedge funds, funds of funds, commodities, real estate and currency diversification. Customers are free to name a classic asset manager with the help of their lawyer, CPA or family office manager, provided certain additional requirements are met. In particular, the manager must have full freedom of choice, although investment policy guidelines may be implemented and changed from time to time.

Most high net worth investors have a diversified portfolio that consists of various investment strategies in order to diversify a portfolio with high yield, short term trading or other tax inefficient strategies, as this is often found to be beneficial for minimizing risk as well as increasing client and return of the Family after taxes. The PPLI policy strategy enables the portfolio to be increased based on the elimination of income tax resistance or the tax friction coefficient, as well as the creation of an additional tax-deferred leveraged asset that only a life insurance death benefit can provide.

Investments that are already very tax efficient (like tax managed offset funds) are not the best candidates for PPLI policy investments. Likewise, highly speculative investments, which are very likely to lose value, are not PPLI investment candidates. This makes PPLI an attractive option even with a capital gains tax rate of 15 to 24% including net capital gains tax. These benefits will become even more apparent under President Biden’s plan when the potential for a capital gains tax rate hike becomes a reality. The policy holder can choose the type of investment strategy for the PPLI policy.

The discerning client has the opportunity through the family office of his investment advisor to analyze all parts of the contract and to make well-founded cost comparisons. The product is more flexible and therefore requires more communication, coordination and knowledge between the accountant, lawyer, insurance professional and family office manager in order to continuously better understand, construct, execute and manage the strategy for the good of the family.

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