Q & A – Inside and Outside PPLI

Questions and Answers  from the book “The Wit and Wisdom of Professor PPLI: How to Achieve Exceptional Asset Structuring with Private Placement Life Insurance”

~ by Michael Malloy, CLU, TEP

Inside and Outside PPLI

Academics Teach Us a Lesson

Section 1, Part 4

 

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Professor PPLI, a key element in this discussion is magic. Give us more insight into how PPLI makes some things disappear and others appear.

This is a good way to view the topic. When we consider the six elements of Expanded Worldwide Planning (EWP), they can be grouped into these two categories. Elements that disappear and those that make things appear.

These categories are somewhat arbitrary, but allow you to collect certain thoughts around these six elements of EWP. We can place privacy, asset protection, and tax shield in the Disappearing Category.

Legitimate privacy allows wealthy families to conduct their affairs outside the prying eyes of those who do not have a rightful interest in their financial affairs. The tax shield in a properly structured policy eliminates taxes in most jurisdictions throughout the world. Asset protection keeps assets outside the reach of ex-spouses, and those seeking easy access to wealth without proper legal authority. This is accomplished using the correct asset protection trust in tandem with the PPLI policy, which adds another layer of protection to the trust.

In the Appear Category, we place trust substitute, compliance simplifier, and succession planning. In some civil law jurisdictions, trusts are not recognized or do not function as well as they do in common law jurisdictions. Using a PPLI policy in the structure can, in some cases, simplify and enhance the planning. PPLI is definitely a compliance simplifier. Since the insurance company becomes the beneficial owner of the assets inside the policy, reporting obligations are greatly simplified and in some cases eliminated. Since the life insurance death benefit passes directly to the designated beneficiaries, it can deliver the death benefit outside the forced heirship laws that exist in some jurisdictions.

One magical aspect of PPLI is that although it is classified as a life insurance product, it functions more like a trust. Since most policies are owned by trusts, you might say that PPLI and trusts join together and become a successful and secure asset structuring marriage. Professor PPLI, please tell us how this is possible. 

The PPLI policy provides elements which are not possible with a trust alone. A trust can accomplish many useful things such as putting into legal language the aims and goals of the wealth owners. A trust also creates an entity that can live beyond the lives of the wealth owners. The following comparison tells the story.

Trust and Insurance Comparison 

Insurance

  • Contractually based and used by millions
  • Tax deferral
  • Insurance company is beneficial owner
  • Simplified or limited reporting
  • Potentially tax free
  • No capital gains taxes
  • No trustee
  • Asset protection

Trust

  • Provides some asset protection
  • Sometimes seen as a tool for the rich
  • Requires “trustee” with full control
  • More stringent reporting requirements
  • Tax filings for trust and possibly beneficiaries required by some jurisdictions

Professor PPLI, you use two very different academic articles in this Section to illustrate a point. Please explain more fully how these two articles relate to PPLI.

Wealthy families are looking for simple and straightforward methods to structure their assets. In part, these two articles illustrate that the financial, political, and governmental aspects of our lives are in constant change. Laws are enacted which sometimes have the opposite effect than was intended by their creators, as one article proves.

Governments are seeking more ways to tax wealthy families, and this is seen by some as a societal good, and by others as governmental overreach. Once assets are properly structured inside a PPLI policy, they are somewhat isolated from these forces, and can pass to future generations according to the wishes of the wealth owners.

by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

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Q & A – The Rainmaker Cometh

Questions and Answers  from the book “The Wit and Wisdom of Professor PPLI: How to Achieve Exceptional Asset Structuring with Private Placement Life Insurance”

~ by Michael Malloy, CLU, TEP

 

The Rainmaker Cometh

Professor PPLI’s Tanned Face

 Part 3

 

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Professor PPLI, there is the phrase to ‘hide something in plain site.’ Isn’t this similar to PPLI asset structures?

 Yes, you hit upon a key point, both geopolitically and in reference to PPLI. Seeking to hide assets from tax authorities is a thing of the past. The desire to seek legitimate privacy, tax efficiency, and asset protection is accomplished through the medium of life insurance with PPLI. ‘In plain site’ because life insurance is such a conservative and widely accepted financial instrument.

With the correct structuring it can achieve the six principles of Expanded Worldwide Planning (EWP):  privacy, asset protection, tax shield, succession planning, trust substitute, and compliance simplifier.

In this part we quote an extended passage by Charles Dickens on the effects of the wind through an English village. Professor PPLI, how is this analogous to PPLI?

 In nature the wind can be a disruptive force, especially when it blows very hard. Indeed, in the Dickens’ passage that we quote, the wind is a very disruptive force, much like a violent winter storm. To quote a more modern depiction of an emotional storm, here are the opening lines of  a song by Bob Dylan, Shelter from the storm:

‘Twas in another lifetime, one of toil and blood

When blackness was a virtue and the road was full of mud

I came in from the wilderness, a creature void of form

“Come in,” she said, “I’ll give you shelter from the storm”

PPLI is just such “shelter from the storm.” In this section of the book, we also present an article by Simon Gorbutt from the STEP Journal. The article describes in detail how PPLI can assist wealthy international families in cross-border situations.

We quote from the Conclusion of the article: “As families and their wealth gradually disperse, and business and personal relationships evolve, even established planning tools can be rendered inefficient or, worse, obsolete. While no structure will weather all eventualities, the flexibility inherent in life insurance and the breadth of its recognition make it an attractive candidate for completing a modern wealth and succession plan.”

Professor PPLI, one can travel almost anywhere in the world in 24 hours. I think you can say our world is the most widely traveled in history. How does PPLI make successful asset structuring more possible in this environment?

PPLI is a true cross-border structuring tool. Many wealthy families are spread out over the globe. At Advanced Financial Solutions we carefully research all aspects of each country where a family member may reside. We also must look into the laws and regulations surrounding each asset in the PPLI structure to ensure that all reporting requirements are being met. In many cases PPLI greatly simplifies the reporting requirements, because the insurance company becomes the beneficial owner of the assets inside the policy.

 

by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

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Q & A – Assets for a ‘Rainy Day’

Questions and Answers  from the book “The Wit and Wisdom of Professor PPLI: How to Achieve Exceptional Asset Structuring with Private Placement Life Insurance”

~ by Michael Malloy, CLU, TEP

 

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Assets for a ‘Rainy Day’

PPLI Keeps You Dry

 Part 2

 Professor PPLI, the client in our dialogue is upset about the condition of his assets. How might PPLI assist him?

 A properly structured PPLI policy functions somewhat like a trust in that it can hold multiple asset classes. To name them individually, the policy can hold:

  • Real Estate/Physical assets;
  • Hedge Funds/Alternative Asset classes;
  • Private Equity;
  • Intellectual Property;
  • Art;
  • Yachts and Private Jets;
  • Alternative Currency denominations.

The insurance company becomes an excellent “home” for multiple asset classes in that:

  • The insurance company is beneficial owner of assets held in the policy;
  • The insurance company is listed as beneficial owner on bank accounts;
  • Transactions are done in the name of the insurance company;
  • There is no look through to policyholders (certain structures).

The discussion in this Part turns to how a client understands or fails to understand an explanation by an advisor. Professor PPLI, how would you explain PPLI to a client in simple, introductory terms?

 I usually begin by saying that PPLI an extension of the retail version of PPLI, Variable Universal Life Insurance, but it functions more like a trust. With proper structuring it can hold almost any asset class. The assets are not subject to taxation once inside the policy, and pass as a tax-free death benefit in most jurisdictions. Most policies are owned by a trust, and the insured life can be any family member or members who have an insurable interest in the policy.

The fees are very low, usually less than one percent of the assets inside the policy. The policy set up fee is usually around one percent of the assets value. The cost of the life insurance is priced institutionally.  The cost is only the wholesale reinsurance company charge with nothing added by the insurance company. These charges are a fraction of the cost of a retail insurance product. The policy also provides excellent asset protection coupled with a correctly written trust.

A paragraph in this Part mentions the function of life insurance in a PPLI policy. Professor PPLI, can you please elaborate on this?

 The life insurance component largely depends upon the family’s aims. If estate planning is paramount, we would use certain policy designs. If access to cash value is key, other policy designs would work better. We can even design a policy where the death benefit is only 5% of the total asset value inside the policy. The death benefit is very much a bespoke element of the policy.

 

by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

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Q & A – PPLI and Understanding

Questions and Answers  from the book “The Wit and Wisdom of Professor PPLI”

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How do we achieve understanding?

 Section One, Part 1

Professor PPLI, please tell us more about how understanding Private Placement Life Insurance (PPLI) leads to a successful outcome for wealthy families?

 When most people think of life insurance, they think of a product. This understanding is much too restrictive for PPLI. Wealthy families are looking for new methods to structure their assets. FATCA and CRS have eliminated many structuring tools that gave these families legitimate privacy.

PPLI is a long-established, conservative tool that uses the six elements of Expanded Worldwide Planning (EWP) to not only produce a structure that gives legitimate privacy, but tax efficiency and asset protection as well. This is the correct understanding of PPLI.

Professor PPLI, why isn’t the understanding that you just explained more widely circulated among those who advise wealthy families?

 We live in an era of specialization, and this is true among those who advise wealthy families:  attorneys, asset managers, accountants, financial planners, and trust officers.  All these disciplines have their own unique focus. Proper PPLI asset structuring incorporates all these disciplines, and blends them into a conservative and tax compliant structure that produces a multi-generational asset structure.

The broad vision of PPLI is sometimes difficult for those who practice these disciplines. One must leave the narrow and safe confines of a certain way of thinking to embrace the broader and more expansive vision of PPLI.

Professor PPLI, please tells us about the history of PPLI. Is it true that it dates back to the 1980s in the United States?

 Yes, this is true. PPLI began in the United States in the 1980s. It was principally used to structure benefits for senior executives at major corporations. It allowed these executives to customize their investments and provide greater benefits than with the standard plans available.

In the early 1990s, it  was adopted by wealth individuals. Attorneys and other advisors saw that PPLI could be a valuable tool in planning for wealthy clients given all the advantages of life insurance, as well as the special properties that we mentioned before. PPLI allows planners to incorporate all of the key elements of EWP into one coherent structure.

In the mid-1990s, major companies entered the market. Insurance companies saw the marketing opportunities inherent in PPLI, and we see companies being formed in tax friendly jurisdictions like Bermuda and Barbados.

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by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

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