Integrated wealth management with an insurance company-based solution

Family offices, trusts, estate attorneys and wealth management firms are increasingly implementing Private Placement Life Insurance for their wealthy clients.

The PPLI structure recharacterizes investments as part of an insurance policy and therefore the investments are subject to the more desirable tax treatment of life insurance – income tax-free growth, the ability to obtain income tax-free loans and, if held until death, the ability to pass the investments along to heirs along with additional policy death proceeds income tax-free.

This is especially appealing for advisors to high net worth individuals and families who often have significant allocations in highly-taxed investments such as hedge funds, private equity and other alternative assets. PPLI can be even more attractive if, on top of tax optimization, there is also a need for life insurance for traditional estate and wealth planning.

By adding an insurance company to the equation, a PPLI-based wealth management strategy includes features not found in a regular bank account. Americans are able to establish a legal and US tax-compliant PPLI policy, the value of which is based on the policy's underlying investment portfolio, which can be managed by a Swiss SEC-registered asset manager designated to do so.

Some of the PPLI's features are:

  • No investment restrictions
  • Tax-deferral on growth (until withdrawals are made)
  • No onerous PFIC (passive foreign investment company) taxes
  • Asset protection against creditors and in case of bankruptcy
  • Estate planning without probate, beneficiaries cannot be contested
  • An alternative to costly and complex trust structures

Pierre Gabris, Alpen Partners International, Bäch/Wollerau | Zurich | Geneva | Locarno | Switzerland

"In plain English, the PPLI policyholder’s account value, based on the underlying assets held within the policy and managed by a designated asset manager, grows tax-free, can be withdrawn tax-free, and is received tax-free by beneficiaries at death."

In order for the PPLI policy to be US tax compliant it may not be self-directed. While the policyholder can choose a general investment strategy, an asset manager needs to be designated to make any and all specific investment transactions. 

The PPLI's underlying investment portfolio must adhere to the IRS diversification rule:

No more than 55 percent of the value of the total assets of the account is represented by any one fund/investment; no more than 70 percent of the value of the total assets of the account is represented by any two funds/investments; no more than 80 percent of the value of the total assets of the account is represented by any three funds/investments; and no more than 90 percent of the value of the total assets of the account is represented by any four funds/investments.

Often insurance-dedicated funds or other portfolios are implemented which are not directly available to the general public.

PPLI incurs an establishment fee and an annual administration fee charged by the insurance company, an asset management fee  charged by the designated asset manager and custodian bank fees.

Adding the element of life insurance to cover biometrical risks may result in even more tax efficiency and estate planning benefits .

IRA funds may be invested and a 1035 tax-free exchange from an existing US policy is possible.

Bernarda Pesantez, BFI Consulting, Ebmatingen-Zurich, Switzerland

"PPLI for international clients, and particularly investors with US connections is a comprehensive wealth management tool that efficiently allows for the minimization of risks and optimization of returns.

While PPLI exists domestically, using the international version of PPLI adds the benefits of true global investment access and multi-jurisdictional checks and balances. PPLI is highly customizable and can be incorporated into estate planning. For clients exposed to US taxation, it qualifies for income tax benefits based on US tax rules. It is a legal concept that works and provides safety for long-term planning as it has been tested, has clear laws, clear interpretation and clear regulation."

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Reporting requirements

US taxpayers are required to pay a one-time 1% Federal excise tax on the purchase of a foreign insurance policy with Form 720 Quarterly Federal Excise Tax Return (unless the foreign insurance carrier (e.g. in the Bahamas) has elected to be treated as a US taxpayer according to section 953(d) of the US Internal Revenue Code).

The policy needs to be reported to the IRS annually by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Form 8938, Statement of Specified Foreign Financial Assets, is required when completing a US Individual Income Tax Return and is attached to Form 1040. The Form 8938 filing requirement is in addition to the FBAR filing requirement.

For comparison, reporting requirements for a bank account (foreign financial account) can include not only the FinCEN Form 114 and Form 8938, but also Form 3520, Form 3520A, Form 5471, Form 8858, Form 8865, or all of them.

DETAILed information

Several Swiss SEC-registered investment advisers implement PPLI with their US clients, giving them the option of assets managed within the PPLI structure.

As there is a slight chance that listing the Swiss investment advisers, insurance brokers and the insurance companies providing insurance policies to American clients here on AW ★ SWITZERLAND, may be construed as "direct solicitation in US jurisdiction", they are not listed here individually but will be provided upon request. 

Egon Vorfeld,  THE FORUM FINANCE GROUP, Geneva

"Pre-immigration tax planning using a properly structured PPLI policy prior to a permanent move to the US can be effective in shielding the assets inside the policy from US taxation for income, gift, and estate taxes."

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DVA PPLI: While it is legal for an American to purchase a policy from a foreign insurance company, this must be done so from outside United States jurisdiction. Foreign insurance companies, their products and the brokers that work with them are not registered in the United States with the SEC or the US State insurance commissioners and they may not promote or market the policies on American soil. The information provided here is of generic nature as it relates to American investors and is for informational purposes only. It does not constitute the promotion or solicitation of any insurance company, product or broker. Please read the disclaimer.