Private placement life insurance (PPLI) typically requires a minimum premium commitment of $1 million or more. By pooling their available assets, two or more givers (i.e., contributors) of an irrevocable life insurance trust (ILIT) can achieve the minimum premium commitment of a PPLI policy. The insured may be one of the givers, but is not necessary.
Through creative creation of trust documents, ILIT (also known as dynastic trusteeship) can provide multiple givers (contributors) and multiple beneficiaries. Each grantor allocates a portion of the lifetime gift and land tax exemption and generation transfer tax exemption (GSTT) to cover its contribution to the trust.
A tax efficient method of building wealth in a dynastic trust is the purchase of a private placement life insurance policy (PPLI) which serves as an “insurance wrap” around the investment. As a result, the investment grows tax-free for the life of the insured, and upon the death of the insured, proceeds are paid to the trust free of land taxes. PPLI is especially useful for holding back short-term, tax-inefficient investments, such as hedge funds, as well as long-term, high-growth investments, such as venture capital and new businesses.
Domestic insurers offering PPLI in the US typically require a minimum insurance premium commitment of $10 million to $50 million. Offshore insurance carriers are more flexible, but are still looking for a minimum premium commitment of around $1 million. This means that many potentially interested individuals or married couples from the economic middle class cannot enjoy the same investment and tax benefits as the rich.
In a typical PPLI dynasty trust scenario, an individual wealthy grantor contributes several million dollars in cash or property to an offshore asset protection dynasty trust, and the trust buys PPLI over the life of the grantor. However, if the grantor cannot afford to pay at least one million dollars, PPLI cannot be purchased.
Conversely, when multiple grantors contribute assets to a single dynasty trust, the trust is likely to have sufficient funds to purchase an overseas PPLI policy. For example, three hypothetical grantors could each contribute $400,000 worth of assets to a dynastic trust. With $1.2 million in assets, the dynastic trust can purchase an offshore PPLI policy, insuring the lives of suitable individuals. Assets in PPLI packages grow free from income tax and capital gains. When the insured dies, the trust receives the proceeds of the policy free of income and property taxes, and the beneficiary receives property tax and GSST-free trust benefits forever.
PPLI’s greater investment flexibility compared to conventional life insurance is the ability to invest policy funds in high-return assets, such as hedge funds or start-ups. Another important advantage of overseas PPLI is the ability of insurance buyers to make in-kind premium payments. For example, if one or more lenders contribute shares, bonds, or business interests to a trust, the trust may fund PPLI’s policies with in-kind assets instead of cash.
In some circumstances, each of the multiple givers (contributors) will have their own ideas on how to design an irrevocable, discretionary asset protection dynasty trust, and will carry their own list of beneficiaries. Therefore, the design and implementation of a multi-grant trustee works best when the grantor has common interests and goals, as might exist among family members. Presumably, the number of beneficiaries increases with the number of givers, so the benefits of the trust may be reduced. On the other hand, since more givers mean more initial contributions and greater trust assets, these factors must be balanced. However, because the dynastic trustee must have substantial discretionary authority to achieve asset protection, rigid allocation of benefits among beneficiaries is usually undesirable.
The giver (contributor) of the irrevocable discretionary PPLI dynastic trust may benefit (at the discretion of the trustee) from the assets of the trust. As investments in PPLI wrappers grow tax-free, beneficiaries (including grantors) can benefit from the PPLI policy’s tax-free loans to trusts. Upon the death of the insured, insurance benefits are received tax-free by the trust. The trust can then buy other PPLI policies to continue tax-free investment growth.
By contributing to multi-grant dynastic trusts who then buy and own offshore PPLIs, individuals from the economic middle class can now take advantage of tax saving, wealth building, asset protection techniques that are generally only available to the wealthy.
Warning & Disclaimer: This is not legal or tax advice.
Copyright 2010 – Thomas Swenson