Private placement variable life insurance can be a useful utility knife for planners.
In 1752 when Benjamin Franklin formed The Philadelphia Contributionship, the organization became the first insurance company in the American Colonies. While much has changed over the past 268 years, the Contributionship still remains in business today, and along with it, the concept of transferring “value” in exchange for goods and services.
Since the beginning of 2000, high-net-worth families have worked with the world’s leading law firms in developing custom-designed variable universal life insurance policies to provide a more complete life insurance solution for their families (a wide array of benefits to their loved ones) and for charities. These policies have been sold via the use of Regulation D “private placement” documents or “PPMs” for securities law purposes. These customized insurance policies are frequently funded with a combination of cash and certain noncash assets, which can include interests in private equity, real property, hedge funds, artwork, aircraft and qualifying majority- owned entities via in-kind contribution.
Overview of In-Kind Premiums
Many tax and life insurance practitioners are unaware that hard-to-value assets, such as interests in private business entities and real estate holding companies (“non-bankable assets”) or “in-kind” premiums are readily accepted by life insurance companies whose primary market focus is with HNW clients seeking customized client-centric life insurance protection plans. For this reason, advisors and their clients miss a variety of the tax-planning solutions that can lead to greater protection and significantly greater tax-advantaged wealth accumulation over the lifetime of the policyholder.
When it comes to the purchase of life insurance, the term “premium” represents the total amount of fiat currency and other consideration (excluding interest on policy loans) that are paid in exchange for the issuance of a life insurance policy and the policy benefits. These in-kind or non-cash premiums become part of the policy’s cash value within the PPVLI policies. These noncash premiums are invested within the policy and receive the same tax treatment as any other types of assets held within any compliant policy, as recently determined under an IRS private letter
ruling non-published and of no precedential value.
From a tax perspective, it is important that the investment policy statement within the policy’s investment fund that governs the investment holdings within the policy be sufficiently broad, and that no prior agreement (expressed or implied) exists between the policyholder and his or her investment advisor regarding the continued holding of the contributed assets within the policy investment/ cash value account basket. The key metric is valuation and maintenance of a diversified portfolio of policy investments within the meaning of Section 817(h) of the Code and the applicable Treasury Regulations.
The National Association of Insurance Commissioners (NAIC) follows this long- standing acceptance of in-kind assets for both casualty and life insurance policies, and goes even further, avoiding any specifically enumerated definition of premium and in-kind premiums within their publications and issuances of regulatory guidance.
Following the death of an insured, it’s common for customized PPLI policies to distribute in-kind holdings from the policy cash value as part of the death benefit’s policy death benefits. Once again, there is no prohibition of in-kind death benefits from a life insurance or annuity policy.
Read the full article by Steven A. Horowitz, Esq., Gerald Nowotny, JD, LLM and Bradley A. Barros here: https://www.wealthmanagement.com/print/120933
