Today’s guest post is written by Grayson Dufrene, CLU, ChFC, TEP, Managing Director at Vie International for the last 10 years. Grayson has over 20 years’ experience working with international clients on their cross-border and wealth planning needs.

Private Placement Life Insurance Products

PPLI and PPVA are US compliant insurance products available to “qualified purchasers” and “accredited investors” under SEC guidelines. It is not a retail insurance solution. However, these products are offered by specialist providers in various offshore jurisdictions such as Bermuda and the Bahamas. The cost of setting up and maintaining a Private Placement policy is lower than a retail offering, which allows the policy to potentially perform far better over time without the higher costs associated with its retail counterparts.

Global Citizens

Experience of working in multiple jurisdictions is critical in the planning of the global citizen as trust, insurance and investment rules vary from one country to another; what may be perfectly acceptable in practice in one country can cause additional taxation and administrative complications in another.

Technical Rules

Collective investments such as Mutual Funds, OEICs, Unit Trusts, Investment Trusts and Hedge Funds, that do not provide US reporting, can be subject to adverse US tax consequences if they are held directly by US taxpayers.

Under Internal Revenue Code (IRC) section 817(h) each “segregated asset account” supporting a Private Placement Policy must contain a certain level of diversification.

Additionally, under the Investor Control Doctrine required by the IRC, the policyholder cannot direct investment strategy or make investment decisions on the “segregated asset account”. In addition, there cannot be any prearranged plan or agreement between the policyholder and the discretionary investment manager either directly or indirectly. The investment mandate needs to be a pure discretionary agreement between the policyholder and investment manager.

Investment managers are required to certify on a quarterly basis with the life insurance company that they have complied with both the investor control doctrine and the diversification rules.

Case Study

Simon is a UK resident and domiciled individual who is married with three teenage children. He has enjoyed a very successful career founding a number of businesses in the UK, which he has sold over the last twenty years. His assets are mostly liquid, and he currently has a net worth of approximately $75,000,000. Simon has been discussing with his accountants a possible move to California; where he would like to look into business opportunities in Silicon Valley. He is not sure how long he will stay in the US at this time.

Simon has recently consulted with an immigration attorney and has secured a visa to move to the US with his family in the next six months. In addition, Simon’s accountant has referred him to a Pre-Immigration Insurance and Financial Professional who can advise him on sheltering his cash and investment portfolio from US taxes while he is a resident there.

As Simon and his family are not currently resident in the US, he will have the opportunity to structure his savings in a Private Placement policy that would be recognised as a life insurance policy under US law. The insurance company can appoint a discretionary asset manager to manage his assets under an investment plan that takes into account his risk tolerance, also his preference for asset classes and currency diversification.

Simon has indicated that he would like some flexibility to withdraw funds from his Private Placement policy in a tax efficient manner. He would also like to have the ability to make tax free loans from the plan so he can invest in new business opportunities that arise in the future.

His Private Placement insurance broker has recommended a Private Placement company and design that takes into account his needs, along with the ability to appoint his chosen investment manager at his bank to manage the underlying assets of the Private Placement policy.

Pre-Immigration Planning Benefits

•  Tax deferral of investment gains on portfolio.

•  Ability to design the investment portfolio so capital can be withdrawn first without current taxation.

•  Ability to make low-cost policy loans without incurring taxation of the distribution.

•  A wide choice of investment professionals to manage the investment portfolio.

•  Flexibility to change investment managers.

•  Asset protection options through trust ownership of the policy.

•  Ability to invest in collective investments (such as hedge funds and private equity funds) in a tax efficient manner.

•  Estate Planning options – Private Placement policy can be held by an irrevocable trust which removes the death benefit from the taxable estate.

•  Ability to surrender the policy without any surrender charges if the policy is no longer suitable for their needs.

•  A Private Placement policy is a low-cost option for affluent investors and is not available to retail clients.

Under the right circumstances, Private Placement Insurance products can be a valuable investment alternative.  However, there are a number of US tax considerations that should be taken into account.  Individuals, as well as advisors, should contact us to ensure these tax issues are fully considered.

Vie International Financial Services is a leader in the design and implementation of offshore Private Placement insurance products for use in solving a number of complex planning strategies. They work closely with the tax advisors and trustees of the ultra affluent to manage accumulation problems for foreign non-­grantor trusts with US beneficiaries and to re-­position investment portfolios for persons who plan to move temporarily or immigrate permanently to the US.

Vie’s advisors have a wealth of experience working with clients and their investment managers to structure non-US investment portfolios within Private Placement Insurance Contracts. Vie International Financial Services can act as an intermediary between the policyholder and the investment manager to assist with compliance issues as they relate to the Diversification and Investor Control Doctrine requirements of the Code.