Wealthy Individuals Seeking Strategies To Mitigate Pending Tax Hike

Many wealthy Americans are scrambling for solutions to reduce the effect of the tax hike Democrats are planning, and Wall Street individuals believe they have found the answer. It’s a niche strategy called private placement life insurance, or PPLI. Many advisors to the top 0.1% say that PPLI is dominating conversations with their clients. Although, the threat of higher taxes isn’t the only factor sparking interest in PPLI. Many noticed that there was a little change in U.S. insurance law at the end of 2020. This change makes the PPLI more powerful since there is competition among insurance carriers which allows many advisory firms to give rich investors more flexibility, lower costs, and a wider choice of products on PPLI platforms. Perks of its policies strike at the heart of Biden’s plans to get the very wealthy to pay more taxes on their investments. There are two major benefits of assets being held in a PPLI policy. The first is that they escape taxes. The other is that when a policyholder dies, the PPLI’s contents are inherited tax-free. Although more assets are flowing into the PPLI strategy, there are still trillions of dollars held in portfolios belonging to the richest Americans.

There are still drawbacks to PPLI policies. Once assets are inside a PPLI, they cannot be taken out without a big tax bill, though they can be borrowed against or rolled into another insurance product. The IRS rules also require policyholders to give up day-to-day control of their PPLI’s investment choices, and the portfolio needs to be diversified in particular ways.

This tool can be combined with other strategies as well. Family offices, as an example, can buy PPLI policies inside dynasty trusts. Dynasty trusts are vehicles that let multiple generations of wealthy heirs avoid estate tax. To get the most out of PPLI, advisers recommend trying to stuff as much money into a PPLI while paying as little as possible in insurance costs.

The bare minimum you’ll need to start a PPLI policy is about $2 million, although it is very common to have at least $5 million into the strategy. Withdrawing money from a PPLI while you’re still alive is taxable, so you should only deploy money that you’re sure you’ll never need.

A COVID-relief law signed by Former President Trump in December makes PPLI even more attractive. This package included a provision that changes the interest rate assumptions on life insurance policies. While this change was to tweak ordinary life insurance products, it has made it possible for the wealthy to put more money into a PPLI policy while paying less to an insurance carrier for life coverage. Even as PPLI’s popularity has spread, it’s primarily pitched to clients as a place to put investments, like hedge funds or credit products. In order to comply with rules, PPLI assets need to go in a separate account that clients technically don’t have any input on. Although many clients choose their advisor to manage the fund and set goals for how they want it invested.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.