With looming tax law changes regardless of the upcoming election outcomes, the ultra-wealthy are revisiting a reliable strategy in financial planning—Private Placement Life Insurance (PPLI). Known for its substantial tax benefits and customization options, PPLI allows policyholders to invest in a diverse range of assets like private equity, hedge funds, and real estate. These assets can grow tax-deferred until the policyholder’s death.
One of the notable advantages of PPLI is the ability to negotiate lower premiums due to the higher amounts invested by wealthy individuals, making it a cost-effective option. Tom Callahan, a family wealth planning director, highlights the efficiency of PPLI, saying, “You can essentially create a tax-efficient wrapper around non-tax-efficient investments and make them completely tax deferred.”
PPLI policies are known for their liquidity compared to traditional life insurance, offering immediate access to funds for paying estate taxes upon the death of the policyholder. Moreover, the death benefits from these policies are distributed to beneficiaries income tax-free, making them an attractive option for preserving generational wealth.
Brian Sak, a managing partner at a financial advisory firm, emphasizes the urgency in utilizing PPLI for estate planning, especially with the potential reduction of the Tax Cuts and Jobs Act exemptions by 2025. Currently, the lifetime exemption limits are set at $13.61 million for individuals and $27.22 million for couples, providing a significant opportunity to transfer wealth tax-efficiently.
However, setting up a PPLI requires substantial upfront investment, making it suitable only for those with a net worth in the tens of millions. The costs involve assembling a team of professionals, including financial advisors, tax professionals, insurance experts, attorneys, and plan administrators.
The complexity of PPLI setups also requires that investments within the policies be managed by a third party to meet the “arm’s-length” standard, ensuring that the assets are legally owned by the insurance carrier and not the policy owner. Each state in the U.S. may also have different policies on taxing premiums, which can significantly impact the total costs of a PPLI plan.
As the political and economic landscape continues to evolve, PPLI remains a robust strategy for those looking to manage their wealth with a keen eye on future tax implications.
