Questions and Answers from the book “The Wit and Wisdom of Professor PPLI: How to Achieve Exceptional Asset Structuring with Private Placement Life Insurance”
The Zen of PPLI
Section 3, Part 2
Professor PPLI, in this Part of the book, you compare the contradiction of the meaning of the word nothing to how PPLI is incorrectly perceived by some people. Please tell us more.
The contradiction arises, in part, because of a lack of knowledge about the origins of PPLI, and how it was initially conceived. PPLI was born in the U.S. in the 1980s to allow top executives at major corporations the ability to invest in multiple asset classes within their pension plans. In the 1990s, it was adopted by wealthy families to fulfill the same need, especially for international families with assets in several jurisdictions throughout the world.
The original use of PPLI very soon spawned a retail version, the Variable Universal Life (VUL) insurance policy. Compared to the original, open architecture version of PPLI described above, the retail version of the VUL can be described as life insurance with a selection of mutual funds from which the client chooses. The choice ideally corresponds to the risk tolerance of the policyowner.
All VUL insurance policies provide tax deferral. The retail version and the original version from the 1980s, which we will call International PPLI. Whatever the asset inside the policy, be it a mutual fund, stock portfolio, yacht, operating business, or alternative investment, there is tax deferral.
Any gain on these assets passes as a tax-free death benefit to the designated beneficiary on the policy. Depending on the policy design, this gain can be accessed through policy loans. The principal, or original value of these assets, can be withdrawn from the policy too. The type of withdrawal is determined by the policy design that the policyowner chooses.
For those who are just familiar with the retail version of the VUL, and the slightly expanded asset offering of what is mostly marketed as PPLI in the U.S., the structuring possibilities of the true International PPLI seem like a contradiction. Much like one of the definitions of the word nothing, “something that does not exist.” It does not exist for them, because they have not taken the time and energy to explore the many structuring possibilities of International PPLI.
Professor PPLI, your comments in the first question remind me of the famous quote by Benjamin Franklin, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” How does PPLI addresses both death and taxes.
Like most aspects of PPLI, death and taxes are dealt with in a bespoke manner. The death benefit can be tailored to the estate planning needs of the family. Frequently, policies are designed with the least death benefit possible, as the policy serves more as asset structuring tool than as a vehicle to pass a death benefit to the next generation.
The timing of the liquidity event that the death benefit produces can also be somewhat calculated. PPLI policies support multiple insured lives. Also, it is possible to insure a younger family member, if the family wishes the liquidity event to be extended, and an older family member, if the death benefit is needed at an earlier date.
The topic of the tax aspects of PPLI is a large one. As an overview, here is a quote from the Tax Management International Journal by members of the
Giordani, Swanger, Ripp & Phillips law firm of Austin, Texas:
“Life insurance is a powerful planning tool due to its favorable treatment under the Code. While under §61(a)(10), gross income includes income from life insurance and endowment contracts, other Code sections — as discussed below — exclude substantial life insurance–related sums from the gross income of policyholders and beneficiaries alike.”
The favorable tax treatment mentioned above in the U.S. tax code is, for the most part, repeated in tax codes of most jurisdictions throughout the world.
Depending on the policy design and assets in the policy, this is a short list of possible tax advantages of using a PPLI policy:
–allow a tax-favored CFC investment;
–eliminate FIRPTA withholding on a U.S. real estate investment;
–avoid subpart F unfavorable tax issues;
–eliminate tax on dividend income;
–pass assets to future generations tax-free;
–eliminate capital gain and income tax;
–eliminate estate tax.
Particularly in art, Zen Buddhism is known for its simplicity. A picture of a famous Zen rock garden is shown in this Part. Professor PPLI, tell us how this relates to PPLI.
The moving parts of asset structuring are greatly reduced for international families when they employ International PPLI. The three elements of any type of life insurance policy are the same for a PPLI policy: owner, insured, and beneficiary. When assets are placed in a policy, they become the cash value of the policy. The insurance company is now the beneficial owner of these assets–no matter what asset class or jurisdiction of the asset.
If there is a tax reporting obligation for the policy, what is reported is just one number. This one number is the total of the cash value of the policy, not any of the individual assets. Even though this is the situation for tax reporting, the assets are held by the insurance company in separate accounts in the name of the policyowner.
These assets are not part of the general account assets of the insurance company. If the company was to be liquidated or become insolvent, the assets would be transferred back to the policyowner. This turns complexity into simplicity, similar to Zen art.
You might think that an asset structure that can deliver the six principles of EWP would be complex. Let us review the six principles: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.
The internal structure inside the policy can become somewhat complex due to the asset classes and jurisdictions involved, but it does add complexity for the international family, as the insurance company takes over the administration of these assets. This also makes life easier for the trustee of the assets. The trustee, as policyowner, still has the ultimate authority, but is relieved of much of the daily administrative functions by the insurance company. Complexity has become simplicity.
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