Private Placement Life Insurance (PPLI) generally requires a minimum premium commitment of $1 million or more. By pooling their available assets, two or more grantors of (ie, contributors to) an irrevocable life insurance trust (ILIT) can meet the minimum premium commitment of a PPLI policy. The insured may be one of the grantors, but need not be.
Through the creative wording of the trust document, an ILIT (also known as a dynasty trust) can provide multiple grantors (contributors) and multiple beneficiaries. Grantors each allocate part of their living gift and inheritance tax exemption and generation-skipping transfer tax (GSTT) exemption to cover their contribution to the trust.
A tax-efficient method of building wealth in a Dynasty Trust is the purchase of a Private Placement Life Insurance (PPLI) policy that serves as an “insurance wrapper” for investments. As a result, the investments grow tax-free during the life of the insured and, upon the insured’s death, the income is paid to the trust free of estate tax. PPLI is especially useful for holding short-term, tax-inefficient investments like hedge funds, as well as long-term, high-growth investments like venture capital and start-ups.
National insurance companies offering PPLI in the United States typically require a minimum insurance premium commitment of between $10 million and $50 million. Offshore insurance companies are more flexible, but still seek a minimum premium commitment of approximately $1 million. This means that many potentially interested individuals or married couples in the economic middle class simply cannot enjoy the same tax and investment advantages as the wealthy.
In a typical PPLI Dynasty Trust scenario, a wealthy individual grantor contributes several million dollars in cash or property to a Foreign Asset Protection Dynasty Trust, and the trust purchases PPLI for as long as the grantor is alive. However, if the grantor cannot afford at least $1 million, PPLI cannot be purchased.
Conversely, when multiple grantors contribute assets to a single dynasty trust, the trust is more likely to have sufficient funds to purchase an offshore PPLI policy. For example, three hypothetical grantors could each contribute $400,000 in assets to a dynasty trust. With $1.2 million in assets, the Dynasty Trust could purchase a PPLI policy abroad, insuring the life of a suitable person. Assets within the PPLI package grow free of income and capital gains taxes. When the insured dies, the trust receives the policy proceeds free of income and estate taxes, and the beneficiaries receive benefits from the trust free of estate taxes and GSST in perpetuity.
PPLI’s greatest investment flexibility compared to conventional life insurance is the ability to invest policy funds in high-yield assets, such as hedge funds or start-ups. Another important advantage of offshore PPLI is the ability of the insurance purchaser to make in-kind premium payments. For example, if one or more grantors contribute stocks, bonds, or business interests to the trust, then the trust may fund the PPLI policy with in-kind assets rather than cash.
In some circumstances, each of the various grantors (taxpayers) will have their own ideas on how to design a discretionary, irrevocable asset protection dynasty trust and will bring their own list of beneficiaries. Consequently, the design and implementation of a multi-grantor trust works well when the grantors have common interests and goals, such as might exist among family members. Presumably, the number of beneficiaries increases with the number of grantors, so the benefits of the trust could be diluted. On the other hand, since more grantors mean more initial contributions and greater trust assets, these factors should balance out. In any case, because the trustee of a dynasty trust must possess substantial discretionary authority to achieve asset protection, a rigid allocation of benefits among beneficiaries is generally not desirable.
The grantors (taxpayers) of a discretionary and irrevocable PPLI dynasty trust may benefit (at the discretion of the trustee) from the assets of the trust. As investments in the PPLI package grow tax-free, beneficiaries (including grantors) can take advantage of tax-free loans from the PPLI policy to the trust. In the event of the insured’s death, the trust receives the insurance benefits tax-free. The trust could then purchase another PPLI policy to continue the growth of the investment tax-free.
By contributing to a multi-grantor dynasty trust that then buys and owns PPLI offshore, individuals in the economic middle class can now utilize a tax-saving, wealth-building, and asset-protection technique generally available only to the wealthy. .
Warning and Disclaimer: This is not legal or tax advice.
Copyright 2010 – Thomas Swenson
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