Private Placement Life Insurance
An alternate solution for your high-net-worth clients.
January 22, 2009
Do you have a client who's had a dissapointing hedge fund experience? They're not hard to find — throw a rock in any direction in a high-net-worth (HNW) neighborhood and you're likely to hit one. With the value of alternative assets depressed, perhaps it's the right time to introduce these clients to "Private Placement Life Insurance." This offers tax-advantaged investing and asset protection all rolled up into one.
In my last column, I detailed the history of Private Placement Life Insurance (PPLI) and compared asset growth between taxed investment and PPLI. In this column, I reveal how to set up a PPLI policy.
PPLI policy premiums start from a low of $1 million ($250,000/year over four years, for example) to a more typical $5 million to $10 million (paid in the early years of the policy or as a single premium). Larger PPLI policies have premiums of $25 million and even $100-plus million for multi-life contracts. To make the investment side of all PPLI policies efficient, early aggressive funding works best. The premiums usually represent less the one half of a client's net worth and are typically in the 10 percent to 40 percent range.
For those planners who regularly serve HNW clients and have some experience structuring life insurance policies with multi-million dollar death benefits for wealth transfer, many of the steps in setting up a PPLI will sound familiar, but these policies have more details and a few twists.
Everyday insurance solutions such as an Irrevocable Life Insurance Trust with Crummey powers (a provision contained in certain irrevocable trusts that permits specified trust beneficiaries to withdraw gifts for a limited period of time) aren't sufficient to get an entire PPLI policy out of the matriarch's or patriarch's estate. Annual exclusions and unified credits don't offer much relief when dealing with a $10 million premium, so gift taxes still loom large. In order to improve asset protection, increase investment options, and avoid state premium taxes and the federal DAC tax, estate attorneys turn to offshore ownership and Alaska Trust solutions, among others.
Some clients keep a policy in the estate to avoid gift tax when they pay premiums, even buying larger policies than they would otherwise. Because these policies have potential income tax savings over many years, some clients view growing assets within a PPLI as highly preferable over a taxable investment account — even when considering the estate taxes eventually due.
To fund a PPLI policy, Robert W. Chesner, Jr., an attorney with Austin, Texas-based Giordani Schurig Beckett Tackett LLP favors using a private split-dollar structure, which acts as intra-family loan. The attorneys on the advanced planning team set up two-ownership entities in the form of trusts. The first one exists completely outside of the patriarch's or matriarch's estate (and perhaps offshore) for income-tax and estate-tax purposes. It owns the policy.
The patriarch, for example, owns the second trust, which can be included for income tax purposes. This trust loans the money to the policy trust. The IRS establishes the loan rate, which is currently about four percent and that's what the policy trust must payback along with the premiums. The real advantage of this arrangement, however, is that the significant growth of the PPLI cash value and death benefit (minus the premiums and interest) occurs outside of the estate and free of income and estate taxes.
"You can start moving the needle to really help mitigate the transfer tax, " says Chesner. "It depends on how much insurance the client buys — it doesn't need to be limited the matriarch or the patriarch. Insurable interest can exist in children, in aunts and uncles and etc."
Setting Up a PPLI Policy
After the client education stage, advanced planning teams focus on five areas:
There you have it. Now you know how you can focus on income tax, estate tax and asset protection with this one solution.
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Lewis Schiff is the principal of Advanced Planning Group, a family office network for advisors. His latest book, The Middle-Class Millionaire, was published in January 2008. View complete details on how to receive a free report on The Highly Effective Habits of Successful Advisors by the authors of The Middle-Class-Millionaire.