Private placement life insurance (PPLI) typically requires a minimum premium commitment of $1 million or more. By pooling their available assets, two or more grantors of (i.e., contributors to) an irrevocable life insurance trust (ILIT) can reach the minimum premium commitment of a PPLI policy. The insured may be one of the grantors, but need not be.
Through creative drafting of the trust document, an ILIT (also known as a dynasty trust) can provide for multiple grantors (contributors) and various beneficiaries. Each of the grantors allocates part of his lifetime gift and estate tax exemption and generation-skipping transfer tax (GSTT) exemption to cover his contribution to the trust.
A tax-efficient method of building wealth in a dynasty trust is the purchase of a private placement life insurance (PPLI) policy that serves as an “insurance wrapper” around investments. As a result, investments grow tax-free during the life of the insured, and upon death of the insured, proceeds are paid to the trust free of estate taxes. PPLI is especially useful for holding tax-inefficient short-term investments, such as hedge funds, as well as long-term high-growth investments, such as venture capital and start-up businesses.
Domestic insurance companies offering PPLI in the U.S typically require a minimum insurance premium commitment of $10 million to $50 million. Offshore insurance carriers are more flexible, but still seek a minimum premium commitment of about $1 million. This means that many potentially interested individuals or married couples from the economic middle class simply cannot enjoy the same investment and tax advantages as rich people.
In a typical PPLI-dynasty-trust scenario, an individual wealthy grantor contributes several million dollars cash or property to an offshore asset protection dynasty trust, and the trust purchases PPLI on the grantor’s life. If the grantor cannot afford at least one million dollars, however, PPLI cannot be purchased.
In contrast, when multiple grantors contribute assets to a single dynasty trust, the trust is more likely to have sufficient funds for purchasing an offshore PPLI policy. For example, three hypothetical grantors might each contribute $400,000 worth of assets to a dynasty trust. With $1.2 million of assets, the dynasty trust could purchase an offshore PPLI policy, insuring the life of a suitable individual. Assets within the PPLI wrapper grow free of income and capital gains taxes. When the insured dies, the trust receives the policy proceeds free of income and estate taxes, and beneficiaries receive trust benefits free of estate and GSST taxes perpetually.
The greater investment flexibility of PPLI compared with conventional life-insurance is the ability to invest policy funds in high-return assets, such as hedge funds or start-up companies. Another important advantage of offshore PPLI is the ability of the insurance purchaser to make in-kind premium payments. For example, if one or several grantors contribute stocks, bonds, or business interests to the trust, then the trust can fund the PPLI policy with in-kind assets instead of cash.
In some circumstances, each of several grantors (contributors) will have his own ideas about how to design an irrevocable, discretionary, asset protection dynasty trust and will bring his own list of beneficiaries. Accordingly, the design and implementation of a multi-grantor trust function well when the grantors have common interests and common goals, as might exist among family members. Presumably, the number of beneficiaries increases with the number of grantors, so that trust benefits might become diluted. On the other hand, since more grantors mean more initial contributions and greater trust assets, these factors should balance. In any case, since the trustee(s) of a dynasty trust must possess substantial discretionary authority in order to achieve asset protection, a rigid allocation of benefits among beneficiaries is usually not desirable.
Grantors (contributors) of an irrevocable, discretionary PPLI dynasty trust may benefit (at the discretion of the trustee) from trust assets. As investments in the PPLI wrapper grow tax-free, beneficiaries (including grantors) may benefit from tax free loans of the PPLI policy to the trust. Upon death of the insured, insurance benefits are received tax-free by the trust. The trust could then purchase another PPLI policy to continue tax-free investment growth.
By contributing to a multi-grantor dynasty trust that then purchases and owns offshore PPLI, individuals from the economic middle class are now able to utilize a tax saving, wealth building, asset protection technique generally available only to the rich.
Warning & Disclaimer: This is not legal or tax advice.
Copyright 2010 – Thomas Swenson