Questions and Answers from the book “The Wit and Wisdom of Professor PPLI: How to Achieve Exceptional Asset Structuring with Private Placement Life Insurance”
Frozen Cash Value Unfrozen
A PPLI Policy for Today’s World
Section 2, Part 5
Professor PPLI, in this Part you connect Leonardo da Vinci with a Frozen Cash Value PPLI policy. Please tell us more.
Let us first hear from Fritjof Capra’s book, Learning from Leonardo: Decoding the Notebooks of a Genius:
“Leonardo da Vinci, the great genius of the Renaissance, developed and practiced a unique synthesis of art, science, and technology, which is not only extremely interesting in its conception but also very relevant to our time.”
We doubt Mr. Capra had PPLI in mind when he said, “but also very relevant to our time,” but for us it is most definitely the case. PPLI asset structuring combines all the unique estate planning and tax efficiency elements of a retail Variable Universal Life Insurance policy with the addition of the most advanced asset protection and trust structuring techniques.
PPLI asset structuring unites the legal, trust, life insurance, asset management, and financial planning disciplines and achieves a state of the art result. This sets PPLI asset structuring far above its competitors in the asset structuring world.
You might call a Frozen Cash Value (FCV) PPLI policy design a subset of the PPLI asset structuring tool box. To quote the Frank Suess article in this Part of the book:
“And, what’s most intriguing about it: It’s valid to this day! While most other effective offshore income tax planning tools have gone to the wayside over the past years, the Freeze, and the concept presented in Prof. Hamptons’ article, still works.”
By the “Freeze,” Mr. Suess is referring to the original name given to the Frozen Cash Value policy design by Prof.Craig D. Hampton in his 1994 article, “The Hampton Freeze.”
A FCV policy design solves several practical issues for wealthy families in structuring their assets. Professor PPLI, please tell us more about this.
For many wealthy families who wish access to the cash value of their PPLI policies during their lifetime, there is not the reinsurance capacity to provide enough death benefit to their policies. This is so because on this type of policy design, there needs to be a large enough death benefit to comply with the tests of section 7702(a) of the U.S. Internal Revenue Code.
By complying with this section of the Code, the policy avoids becoming a Modified Endowment Contract (MEC), and thus forfeiting some of the tax advantages of a life insurance contract. A FCV policy design solves this issue. In most situations, the death benefit need be no more than 5% of the total assets contributed to the policy.
The owner of the policy still has access to up to 90% of the assets contributed to the policy during the lifetime of the insured person(s) within the policy, and the gain in the cash value passes as a tax-free death benefit at the passing of the insured person within the policy.
This means that for each $50M in assets, there will only be $2.5M of death benefit. Especially, if the impetus for the policy is to pass a tax-free death benefit to the next generation, this solution works very well. The policy design will always keep the death benefit at 5% above the total assets in the policy. So let us say, the assets grew to $75M at the death of the insured life within the policy. The death benefit component of the policy would then only be $3.75M. But the total death benefit that would pass tax-free would be $75M + $3.75M for a total of $78.75M.
This much lower death benefit described above is also helpful when the insured is in poor health, so if the policy has extra charges because of a health condition, the amount of death benefit is so small that the death benefit can still be very affordable, and the policy can usually be issued.
Professor PPLI, please tell us more about how the increase in the cash value of a FCV policy passes as a tax-free death benefit at the death of the insured person within the policy.
In this Part we provide the following from Michael Kitces’s article, “The Tax-Preferenced Treatment of Life Insurance Policies:”
“To further encourage the use of life insurance, Congress has also provided under IRC Section 7702(g) that any growth/gains on the cash value within a life insurance policy are not taxable each year (as long as the policy is a proper life insurance policy in the first place).
As a result, if a permanent insurance policy is held until death, the taxation of any gains are ultimately avoided altogether; they’re not taxable under IRC Section 7702(g) during life, and neither the cash value growth nor the additional increase in the value of the policy, due to death itself are taxable at death under IRC section 101(a).”
In addition, the offshore insurance companies that provide FCV policies design the policies so that the cash value by definition does not increase. The policyowner only has access to the premium that is contributed to the policy during the lifetime of the insured life(s) for the policy. As stated above the increase in cash value, passes to the beneficiary as a tax-free death benefit at the death of the insured life(s).
Offshore PPLI insurance companies offer policy designs that assist wealthy families throughout the world in their quest to secure the six principles of Expanded Worldwide Planning (EWP): privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute. We invite you to explore these designs at Advanced Financial Solutions, Inc. today by calling us for a no-charge initial consultation.
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