Tax and Private Client Blog

Tax Efficient Investments for Domestic and Foreign Clients – Private Placement Life Insurance

By Eli Akhavan

What is Private Placement Life Insurance?

Private Placement Life Insurance (PPLI) is a planning tool to help high net-worth individuals and families diversify their investments, while having all their investments accrue tax-free within a cash value insurance policy.  

A properly designed PPLI plan provides income and estate tax savings, as well as creditor protection benefits.  The income on investments earned by a PPLI policy is not subject to income taxes, and any assets owned by the policy upon the death of the insured are not subject to estate taxation.  Furthermore, assets owned by a PPLI are generally not subject to the insured’s or the beneficiaries’ creditors.     

Finally, a PPLI structure is attractive to foreign investors in the United States because it may be possible to simplify or even be exempt from FATCA and CRS reporting.   

Architecture of a PPLI Policy

In preparation for a PPLI plan an individual or a trust purchases a specially structured life insurance policy on the insured’s life.  The policy may be issued by either U.S. or foreign companies, and the premiums generally range from $3 million to $5 million, but could be more or less depending on the circumstances.   At the insured’s death, the policy pays the beneficiary the stated death benefit amount, plus any cash accumulation in the policy.  The entire death benefit, including the cash accumulation received by the beneficiary, is income tax free. 

The policy itself should be structured to be a non-MEC (i.e., a non-modified endowment contract) policy for income tax purposes to ensure that funds that exceed the basis may be borrowed against the policy tax-free. 

The premium paid to the PPLI policy is used to for two purposes.  One portion funds the life insurance component and another portion is invested in what is called a “segregated’ asset account of the insurance company.  The owner of the policy is then able to select from a variety of investment options.  Eligible investments include hedge funds, master limited partnerships and even private businesses such as real estate investments.  To provide additional flexibility, the owner of the account can select the investment fund manager.  However, the owner of the policy is restricted from exercising investment control – otherwise, all tax benefits may be lost. The investments must meet certain diversification requirements.

Receive Income – Tax Free!

If the PPLI policy is structured properly, the increase in cash value during the life of the policy is not taxed.  Furthermore, the underlying investments that yield capital gains are not taxable either.  One concern for taxpayers is how to access the cash values inside the policy without paying taxes.  This is typically done by ensuring that the policy is considered a non-MEC policy and then borrowing against the policy (at very favorable rates).

Estate Tax

Typically, the PPLI policy will be owned by an irrevocable trust.  The irrevocable trust has to be structured properly so that any assets inside the PPLI policy, including the cash and capital accumulations not be part of the taxable estate of the insured. 

Creditor Protection

A properly designed PPLI structure will generally protect the insured as well as the beneficiaries of the insured from creditors.  Aside from being owned by an irrevocable trust which provides general creditor protection (if drafted correctly), the laws of many states protect insurance policies and benefits from the creditors of the insured and beneficiaries.

Our View

PPLI structures provide tax and non-tax benefits to both US residents as well as foreign investors in U.S. assets.  If you have significant investments in income producing assets we strongly recommend you consider consulting an advisor as to how a PPLI structure can help optimize your holdings. 

Should you have any questions or desire further insight, feel free to contact one of the members of our Tax Department:

Mayer Nazarian, Chair of the Tax Department
Phone: (310) 400-0110
Email: mnazarian@ckrlaw.com

Eli Akhavan, Chair of the Private Clients and Wealth Preservation Practice Group
Phone: (212) 259-7300
Email: eakhavan@ckrlaw.com