PPLI Library

Offshore trusts are regarded by the government and the average American as suspect. Courts have cast a negative shadow over the propriety of debtors protecting their assets by placing them in offshore trusts.

Insurance is seen as socially desirable. In light of this, the desirable and tax efficient insurance planning environment is an alternative to the undesirable offshore trust planning environment which provides asset protection, but no tax protection:

• Purchase Private Placement Life Insurance to protect assets and allow them to grow in a tax-free insurance environment and be available at retirement.

• Purchase Private Variable Annuities to protect assets and allow them to grow in a tax-free environment 

Purchasers of traditional life insurance seeks a large death benefit for the minimum amount of premium. A purchaser of PPLI wants the opposite. A PPLI is purchased for tax planning purposes with the objective of depositing cash (to invest) into the policy while maintaining the minimum death benefit. 

PPLI and PPVAs enhance the performance and rate of return on investments that are not income tax-efficient. PPLI and PPVAs offer the tax advantages and protection of insurance plus the advantage of the investor having a limited right to direct the cash value of the policy among a number of investment options.

The client is not buying traditional life insurance. The client is buying tax and asset protection advantages arising from the structuring of their investment assets within the tax-free wrapper of insurance. With offshore PPLI they are able ability to pay premiums with assets other than cash which avoids the need to liquidate their assets. 

PPLI purchasers want investment options; they want their own investment managers and they want products customized to their need.

To understand the difference in investing via a PPLI Structure and investing directly we will compare the hypothetical tax experience of Lois Los Angeles, an American, and George Berlin, a German not living in the U.S.

Both Lois and George have invested in stock. Both purchased the stock for $10k. Currently the stock is worth $2M. Both believe they can grow their money at 12% per year.

Lois and George have each visited their accountants to see what their retirement would look like financially. The results are as follows:

Lois Los Angeles: No Planning

• $2M stock with a $10K tax basis = $1,990,000 taxable gain.
• $1,990,000 capital gains x 30% tax = $597,000 capital gains tax [both federal and state.
• $2m - $597,000 = $1,403,000 sales proceeds.
• $1,403,000 X 12% investment yield - 30% tax = 8.4% after-tax yield.
• $1,403,000 x 8.4% x 20 years = $7,483,945 (compounded monthly).

George Berlin: With Planning

• $2M stock with a $10K adjusted basis = $1,990,000 gain.
• $1,990,000 capital gains x 0% tax = $0 capital gains tax.
• $2M - $0 = $2m sales proceeds.
• $2M x 12% investment yield - 0% tax = 12.0% after-tax yield.
• $2M x 12% x 20 Years = $21,785,000.

Lois was startled that she would only have $7.4m. She then visited George's accountant and received even worse tidings.

George's $21.8M would go to his children estate tax-free, because his PPLI was owned by a Trust.

Lois's $7.4m will be subject to estate tax (45%). Her children would only get $4m.

If Lois did not want to pay $18 million extra, she should have “expatriated her stock” when it was worth $10,000. She could have accomplished this through a PPLI Structure.

Lois can form a dynastic trust. The purpose of this trust is to hold the policy and receive the insurance proceeds on the insured's death and thereby protect those proceeds against creditors or lawsuits and avoid the imposition of the estate tax.

To the extent the insurance proceeds are more than enough to provide for her (Lois') family, the balance will go to her grandchildren, again without tax, if she utilizes the generation skipping transfer tax (GSTT) exemption.

The insurance company should reinsure its policies with a major reinsurer. Therefore the net worth of the reinsurer, not the insurer, is of primary importance. After reinsurance, the insurers liability for a policy it issues is a fraction of the face amount.

A bank may hold the assets of the policy. Therefore the net worth of the major bank, not the insurer, is of primary importance. If the client needs more security then a custodial account can be used.

The insurance company must control the management of the policy's assets. If the policyholder has too much control over investments then the policyholder will be treated as the tax owner.  If the arrangement between the insurer and the insured is similar to the arrangement between a traditional brokerage firm and its investors, the insured will be held to be the beneficial owner.  Where the insurance company controls the investments in mutual fund shares and the [Missing]

The segregated asset requirements of the Regulations for IRC §817 provide no restrictions or guidelines on the source of assets acquired. With an IBC, a board of directors, independent of the insurance company to avoid the issue of a subservient agency, could evaluate and ratify a purchase from a policyholder.