Pursuing Minimized Taxes With Private Placement Life Insurance

Carolyn B.R. Decker, CFP®, CPA, PFS BY: Carolyn B.R. Decker, CFP®, CPA, PFS 05.21.18

How High Net Worth Investors Can Have Their Cake and Eat It Too, with PPLI

The increase in the estate exemption to $11.18m in 2018 has many Americans and their advisors focusing more on income tax planning than estate tax planning.

This shift in focus makes sense: transferring wealth outside of a client’s estate for the benefit of their children and future generations means those assets and their appreciation will not be subject to the estate tax at their death. However, they do not get a step-up in basis for income tax purposes, the result of which can be significant taxable gains when those assets are eventually sold.

For individuals whose net worth is $10m or less, it may now be better for them to NOT transfer wealth outside of their estate, and instead plan on holding it at death to achieve the step-up in basis. Of course, future tax law changes that reduce the exemption amount could still make wealth transfer planning valuable.

What Is Private Placement Life Insurance (PPLI) And How Does it Work?

So, how can an individual get the best of all worlds: transfer assets outside of their estate, invest in a diversified and appreciating portfolio, and not burden the next generation with a huge income tax bill down the road? One answer may be Private Placement Life Insurance, or PPLI.

PPLI was once a strategy for the uber-wealthy who could afford to put tens of millions of dollars into the structure. Today, PPLI is becoming even more accessible to ultra-high net worth families. PPLI is basically a life insurance policy with a high internal cash value that can be invested in a variety of ways. Like any life insurance policy, neither the appreciation of that internal value, nor the ultimate payout of the death benefit, is subject to income tax.

This structure effectively gives a client the same step-up in basis they would get if these assets were held inside their estate!

While individuals can purchase PPLI policies new, one of the ways PPLI is becoming more accessible is by allowing individuals to use existing life insurance policies. This accessibility is a recent development with insurance carriers that enables investors to attach a PPLI investment account to an existing policy (one not originally bought with PPLI in mind). The death benefit on the policy and the insured’s age will dictate how much in investment assets the policy can carry tax-free.

For individuals with health issues who can no longer obtain new life insurance policies, this development removes a significant roadblock. Additionally, using an existing policy can mitigate some of the costs of obtaining new life insurance, allowing additional premiums paid in to go further toward the investment accounts.

While there are other conditions to consider before proceeding with PPLI, it continues to be an attractive way for clients to achieve both income and estate tax minimization.

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