Reprinted with permission from Practical Tax Strategies.
ESTATE PLANNING
PRIVATE PLACEMENT LIFE
INSURANCE: STRATEGIES,
ADVANTAGES, AND
CONSIDERATIONS FOR HIGH
NET-WORTH INDIVIDUALS
TERRY LABANT
Hedge funds are tailored to investors who seek
greater return through managers who can move
more quickly among investment styles and asset
classes. This opportunistic investment style,
however, often results in substantial portfolio
turnover. As a result, hedge funds typically produce short-term capital gains that are taxed at
higher, ordinary income tax rates. Income taxes
alone can cost more than 50 cents on the dollar
when combining the highest federal income tax
level (39.6%), federal investment surtax (3.8%),
and state income taxes in higher-taxed states.
When hedge fund investments are held
within a life insurance vehicle, though, investment gains are not subject to tax. This provides
the investment greater opportunity to grow and
compound when not affected by higher income
tax costs.
Why? The answer lies in the fact that investments held within life insurance policies are not
subject to income tax as they would be if held
individually. This income tax exception applies
to compounding gains during one’s lifetime as
well as the death benefit paid to a beneficiary.
Can everyone seek private placement life
insurance?
Individuals must pass two tests in order to purchase private placement life insurance (PPLI).
They must be:
TERRY LaBANT, J.D., is vice president and senior wealth strategist at
Calamos Wealth Management in Naperville, Illinois. He has more
than 20 years of experience as a tax attorney in the core areas of wealth
creation and preservation. At Calamos Wealth Management he provides guidance and planning assistance to individuals and business
owners on matters pertaining to tax, estates, and retirement.
1. A qualified purchaser.
2. An accredited investor according to the Securities and Exchange Commission (SEC).
The first test can be easy to meet: A qualified
purchaser simply refers to an individual who is
medically insurable from a health perspective.
The second (SEC) test can be harder to meet.
An accredited investor refers to someone who
earns at least $200,000 annually and has investable net worth greater than $5 million.
Other considerations
A typical PPLI policy is funded with a minimum of $10 million, supporting an initial death
benefit of approximately $30 million, and requires full premium payment within a shorter
(less than seven-year) time period. This structure raises the bar for qualified individual purchasers seeking PPLI; however, this structure
also leads to lower (institutional-like) policy fee
structures.
Individuals also cannot simply choose their
own investments that will be held in the PPLI
policy. Instead, the issuing insurance company
maintains a list of pre-qualified investment
choices and vehicles. As a result, individuals
have limited choices among the types of hedge
funds or private equity they choose to hold
within the policy for investment.
An individual may be able to take a loan
against the policy value without being subject to
income tax on the loan amount, provided that
the policy is not treated as a modified endowment contract (MEC). A policy may be treated
as an MEC when funded rapidly. Still, PPLI purJULY 2016
PRACTICAL TAX STRATEGIES
25
properly structured trust vehicle, relinquish all
incidents of ownership and thereby avoid estate
tax on the policy value. For example, an individual could create an irrevocable life insurance trust (ILIT) to own and benefit from the
PPLI. In this case, the ILIT trustee (who is not
under increased scrutiny by the IRS over the
years. Charitable lead trusts also have been
used to own PPLI policies, but they require
careful structuring by advanced estate planning
attorneys to operate correctly under current
law. n
chasers are typically focused on tax efficiency
more than loan access.
the insured) would govern all other decisions;
the insured would not maintain any incidents
of ownership, and the policy value would not
be included in the insured’s estate.
The ILIT would provide a means for the insured to shift wealth to heirs tax free while
growing its base more tax efficiently through
the investment choice (hedge fund) and structure (insurance policy held in an ILIT). Again,
the insured would not benefit directly from the
PPLI, but the PPLI structure would provide a
means to transfer vast wealth to family members quickly and tax efficiently.
Some offshore trust structures have been
used to own PPLI policies, but these have fallen
under increased scrutiny by the IRS over the
years. Charitable lead trusts also have been
used to own PPLI policies, but they require
careful structuring by advanced estate planning
ESTATE
PLANNING
attorneys to operate correctly under
current
law. n
Do they also provide wealth transfer (estate tax)
benefits?
26
26
That depends. Life insurance generally is not subject to income tax as noted above, but it remains
subject to estate tax when a person maintains “incidents of ownership” over the policy. For this purpose, an incident of ownership refers to the right to
control the policy. Examples of incidents of ownership include the right to change the owner or beneficiary or to borrow against the policy value.
Individuals could contribute the PPLI to a
properly structured trust vehicle, relinquish all
incidents of ownership and thereby avoid estate
tax on the policy value. For example, an individual could create an irrevocable life insurJULY 2016
PRACTICAL
TAX STRATEGIES
ance trust
(ILIT) to own
and benefit from the
PPLI. In this case, the ILIT trustee (who is not
PRACTICAL TAX STRATEGIES
JULY 2016
Sources: irs.gov, Internal Revenue Code of 1986, as amended, Sections 101 and 2042. CCH U.S.
Master Tax Guide 2016, CCH U.S. Master Estate and Gift Tax Guide 2016.
For more information about federal and state taxes, please consult the Internal Revenue Service and
the appropriate state-level departments of revenue, respectively. Opinions referenced are as of March
31, 2016. Please remember that past performance may not be indicative of future results. Different
types of investments involve varying degrees of risk, and there can be no assurance that the future
performance of any specific investment, investment strategy, or product (including the investments
and/or investment strategies recommended or undertaken by Calamos Wealth Management, LLC),
or any non-investment related content, made reference to directly or indirectly in this newsletter
will be profitable, equal any corresponding indicated historical performance level(s), be suitable for
your portfolio or individual situation, or prove successful. Due to various factors, including changing
market conditions and/or applicable laws, the content may no longer be reflective of current opinions
or positions. Moreover, you should not assume that any discussion or information contained in
this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from
Calamos Wealth Management, LLC. To the extent that a reader has any questions regarding the
applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged
to consult with the professional advisor of his/her choosing. Calamos Wealth Management, LLC is
neither a law firm nor a certified public accounting firm and no portion of the newsletter content
should be construed as legal or accounting advice. If you are a Calamos Wealth Management, LLC
client, please remember to contact Calamos Wealth Management, LLC, in writing, if there are any
changes in your personal/financial situation or investment objectives for the purpose of reviewing/
evaluating/revising our previous recommendations and/or services. A copy of the Calamos Wealth
Management, LLC’s current written disclosure statement discussing our advisory services and fees is
available upon request.
Calamos Wealth Management, LLC,
Attn: Compliance Officer, 2020 Calamos Court, Naperville, IL 60563-2787
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PRACTICAL TAX STRATEGIES
JULY 2016
ESTATE PLANNING
Calamos Wealth Management
2020 Calamos Court | Naperville, IL 60563
800.857.7604 | www.calamos.com/wm | [email protected]
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of Calamos Investments LLC.
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