With the 2017 tax reform, there were a few items that could have drastically changed estate planning strategies for the affluent individual. But, let’s keep a few things in mind:
- The bill passed with zero Democrat support. When Democrats get back the majority, they are likely to do whatever is in their power to dismantle the bill, so these changes may be short-lived.
- Several changes are set to revert within the bill itself. For example, the new estate tax exemption more than doubled from $5.6 million to $11.4 million. This means married couples can give up to $22.8 million over the course of their lifetime (and including death) without having to pay any estate tax. However, in 2026, the estate tax exemption reverts back to $5.6 plus an adjustment for inflation. Unless you die within the next 9 years (or gift $22.8 million between now and then), you will still be subject to that good old 40% estate tax for anything above $11.4 million per couple.
- If you have over $23 million in assets, planning for estate taxes is still a consideration.
- Capital gains taxes have not changed.
Use the Best Fertilizer
Let’s say you were planting an orchard. If you take the time to fertilize and protect your saplings from the elements while they are young, you and your children will be able to enjoy their fruit for many years to come. Similarly, with succession planning, there are a few little-known tools that you can use to protect and grow your assets now, so that you and future generations can benefit from them for years to come, no matter what the current tax laws are. One such tool has allowed some investors to quietly, legally and very successfully amass significant sums of money. Private Placement Life Insurance (PPLI) is like a fertilizer for your assets.
What is PPLI?
PPLI is a form of variable universal life insurance that has a great deal of flexibility, and even greater benefits. The assets in the policy are divided into a death benefit and cash value portion. The cash value portion can be invested in any number of vehicles including hedge funds, mutual funds and stocks. As per usual, the insurance company must carry the risk for the death benefit. However, with PPLI, the risk for the cash value portion is entirely on the customer, which also means that there is a higher potential reward, and lower fees.
The Main Benefit
The reduced fees and potential for a higher return are only a small consideration when compared with the primary benefit: your investments are wrapped up in an insurance policy, and insurance policies are not subject to taxation. So when the PPLI has been set up properly by an experienced advisor, taxes are not levied on the gains, withdrawals are not taxed, and the death benefit is not taxed. Moreover, if you purchase your policy through a foreign insurance company, creditors cannot make claims on the assets either.
A Difference of $74 Million
Let’s conservatively use a Bloomberg example for Insurance Dedicated Funds (which could include PPLIs or certain types of annuities): A middle-aged nonsmoker (let’s name him Jorge) can contribute $2.5 million to the policy for 4 years, and in 40 years the investment would be worth $113 million (assuming an internal rate of return of 6.5%). If Jorge had invested funds directly (and had to pay taxes), the account would be worth $48.8 million. That’s a difference of more than $64 million!
Now, let’s take the example further. Assuming he invested within a life insurance policy, all $113 million would transfer to the next generation. On the other hand, if it were a typical investment, $26.4 million of the estate would be taxable at 40% (based on the new estate tax exemption), and he would transfer a little over $38 million to the next generation. By using life insurance, Jorge would be able to retain over $74 million more for himself and his children.
No, This is Not Too Good to Be True
You’re not going to pinch yourself, and find out that this was all a dream. The premiums are higher than other types of insurance. There are certain restrictions that must be in place for this to work; a knowledgeable advisor must help ensure that your policy is set up to benefit from tax-favored status for your lifetime. A few of the considerations include:
- The investors must be qualified and insurable.
- You cannot pull out more cash than you paid in premium (but why pull out cash when you can take out a tax-free loan on it and allow the assets to continue to grow unfettered?).
- The investments within the policy must be selected from a list provided by the insurer (however, investments can be managed by the policy owner’s investment advisor).
Add it to the Arsenal
With careful planning, the benefits of PPLI can far exceed the cost, and extend to future generations. If you would like to determine whether PPLI fits into your portfolio, Axia Global can help. Our goal is to make a measurable difference in your financial life.
If you would like to receive a complimentary copy of our PPLI Program Overview for a more detailed description of how our program works, give us a call.
About Axia Global
J. Michael Roney, founder of Axia Global, has worked alongside the best financial and legal professionals in the field for decades. He has written a book on wealth preservation, and his calling is to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.
Note: The statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with trusted advisers.