 |
 |
| Areas of Practice |
Private Placement Life FAQ
What are the key legal concepts of the Private Placement Life? The key legal concepts, based on insurance and tax law, are: (1) ownership and funding of the policy including whether to create an ownership entity such as a partnership or irrevocable life insurance trust (ILIT) to avoid estate taxation on the death benefit; (2) if an ownership entity is used then gift tax issues must be addressed including the utilization of "Crummey" powers and the unified credit, split dollars loans, and 7872 loans, all of which reduce or eliminate gift taxes on the transfers of cash into the ownership entity; and (3) whether any of the cash value should be used to acquire an underlying company as an investment of the policy’s cash value. The ownership structure is often referred to as the "Platform". Has a legal opinion been issued? Yes, our firm has written a legal and tax memorandum explaining the legal and tax concepts and issues of life insurance planning. Such is available to lawyers who co-counsel with our firm to represent their clients with this strategy. Yes. The Platform is based on concepts of insurance and tax laws that have been around for decades, and are nothing new or exotic. Our firm has spent over a thousand hours of research and analysis time over the last five years thoroughly examining the legal and tax issues involved. Why do we need to involve an insurance company in Private Placement Life? While buying life insurance is not an exciting topic for most people, a life insurance policy complying with all the US tax laws is an essential component of this planning and, when properly established, extensive income tax advantages can be obtained. Where is the insurance company located? There are numerous insurance companies in the US and abroad that are providing Private Placement Life Insurance to the HNWI market. How would I utilize the a Private Placement Policy?
Generally a different kind of life policy is used for estate tax reduction and the life policy must be owned by a Platform or something similar. The Private Placement Policy
Private placement Polices are quite sophisticated and there are many traps for the unwary. A sampling of some of the tax traps that have to be addressed (and that can be avoided) by skilled tax professionals are:
The tax concepts of the Platform may be best explained by way of an example: Client wishes to defer income taxation on her investment portfolio consisting of a mix of stocks and bonds totaling 5.0 million dollars. Client acquires a Private Placement Life Policy with some of all of the assets in her investment portfolio. Client transfers some or all of the investment portfolio into the Platform with a Private Annuity. Subsequent growth and income is not subject to current income taxation until withdrawal from the policy. Upon client's death, the death benefit received by the beneficiaries of the life policy is income tax free and estate tax free.
Alan Jahde is the primary attorney involved from our firm in the design and uses of the Platform. He has spent five (5) years researching and perfecting the planning techniques and application. Mr. Jahde also utilizes the services of an experienced financial and insurance person with regard to the underwriting and insurance application process. A client of our firm who created the Platform was audited in early 2001. While the IRS examiner questioned the entire plan thoroughly, including consultation with the IRS international office, the planning eventually "sailed" through the audit process and there was no change. The key components of the Platform (i.e., the use of an ownership entity to own a policy and the tax principles of life insurance policies) have been tested in many ways by the Tax Court and US District Court. Numerous Internal Revenue Code sections are applicable, and many rulings and regulations have been promulgated interpreting the Code sections, all resulting in rather straightforward rules and guidelines, and fairly well defined boundaries. Another key concept is that the private annuity or promissory note received in exchange for assets transferred must be designed to be at arms-length and therefore the note or the private annuity must be equal to the fair market value of the assets transferred and the interest rates must be at least the IRS published minimums. Another key concept which may be applicable to private annuities is the "Exhaustion Test". We have provided a research memorandum about the "Exhaustion Test" for downloading on the Forms page of our website. How many Platforms have been created by your firm for other clients? After five (5) years of a research and the design startup phase, our firm has created in excess of thirty (30) plans in the last 3 years. Would it not be easier to merely set up a foreign corporation to avoid US income tax? Yes, it clearly would be easier to merely set up a foreign corporation if it worked under our US tax system. Unfortunately, the use of a foreign corporation with investment type assets does not avoid US tax because of the CFC or PFIC rules. Go to our forms page to download a summary of the CFC, PFIC and US trade or business tax rules and US source rules of foreign corporations. Will Congress or the IRS change the tax rules? Anything is possible, but if the tax rules change, generally the change is not applied retroactively. Therefore, it is likely existing Platforms would be grand-fathered. The insurance industry also has an incredibly powerful lobby that would most likely guard against dramatic changes to the tax concepts involving life insurance. If the worst case scenario occurs and somehow the changes are done retroactively, the policy could then be surrendered whereby the cash value would be distributed by the insurance company to the policy owner. The surrender of a life insurance policy generally does trigger tax if the cash value has increased beyond the premiums paid. However, the tax should be generally less than the tax the client would have paid if the client had not done the planning. Why not always use a US insurance company? The legal and tax concepts do not require the use of a foreign insurance company and in many ways it is advantageous to use a US insurance company. Part of the planning process is to compare the costs, flexibility, and overall advantages and disadvantages of US and Non US life insurance companies. What is the typical profile of a client who would use this planning? Most clients place in excess of $2.0 million into the Platform and such constitutes only a portion of the client's accumulated wealth. Most client’s typical goal is to not diminish investment performance because of income or capital gains taxes incurred on the investment portfolio. What does it cost to build a Platform? The answer depends upon the type of assets involved and the amount of "bells and whistles" that a client wants on the Platform and the intended uses. Generally the cost runs between $25,000 - $40,000 in legal and set-up costs. Is there a minimum amount of assets necessary for this planning? Typically to justify the cost of the planning, the client needs to transfer at least $2.0 million into the Platform. |
