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Introduction and Overview of PPLI and Annuities:
Why Do They Make Sense Now?
Privately placed life insurance and annuities
• Versatile financial instruments combining alternative
investments with income tax deferral/elimination and
insurance protection
• Tax-efficient investing for
High-net worth individuals
Banks, corporations, insurance companies, US/non-US
pension plans, sovereign wealth funds
• Financial and Estate planning
2
Introduction and Overview of PPLI and Annuities:
Why Do They Make Sense Now?
Positive Environment
• High marginal tax rates
• Ever increasing availability of top-flight investment choices
• Charitable giving
3
Life Insurance and Annuities - Basics
You bet your life
• Term insurance – insurance company bets that you will live
• Life annuity – insurance company bets you will die
+ Tax-advantaged investment component
• Whole life – permanent insurance and returns based on low-
return portfolio managed by insurance company
• Deferred annuity payment options – payments begin after
multi-year deferral period for life, life plus, term of years
4
Variable Contracts - Investments
Variable life insurance and annuities – returns based on
investment options offered by insurance company
selected by policy holder and held in a separate account
Retail variable life insurance and annuities are “securities”
– investment options are special mutual funds
PPLI and PPVA are also “securities” – investment options
are special privately offered hedge funds, private equity
funds, fund of funds, real estate funds, and managed
accounts providing potentially higher yields and lower
volatility
5
Features of PPLI and PPVA
PPLI PPVA
Underwriting Yes No
Tax deferred growth Yes Yes
Income tax free death benefit Yes No
Favorable tax treatment on loans and
withdrawals
Yes
(if desired)
No
Separate account assets / bankruptcy
remote
Yes Yes
Capacity constraints Yes No
6
The Separate Account – Insolvency Remote
A separate account is established under state law
An insurance company’s separate accounts supporting
PPLI/PPVA contracts need not be registered as
investment companies
PPLI/PPVA assets are segregated from the general
account of the insurance company
7
PPLI/PPVA Structure
Insurance Company
Separate
Account
PPLI / PPVA Insurance
Contract
Policy Owner
$ Premiums
Investment
Manager
$
Insurance Dedicated
Fund ( “IDF”)
Diversified
Investments
8
PPLI MECs and Non-MECs
Modified and Non-Modified Endowment Contracts
A PPLI policy will be a MEC if it fails to meet the 7-Pay
Test under Code section 7702A
All privately placed variable annuities are MECs
IDF gains accrue income tax free
Death benefits received income tax free
9
PPLI Taxation of Non-MECs and MECs
Non-MECs - Policy loans are not considered distributions and are not
subject to income tax
Non-MECs - Policy loans are non-reportable events and are typically
transacted at attractive loan spreads, e.g., 50 bps spread
Non-MECs - Withdrawals are treated as coming from basis in the contract
first and investment earnings thereafter
Non-MECs - Withdrawal of basis is not subject to taxation
MECs - Policy loans are considered distributions and are subject to tax
as ordinary income
MECs - 10% tax penalty imposed on distributions made before age 59½
MECs - Distributions are treated as coming from investment earnings first
and from basis in the contract thereafter
10
High Marginal Tax Rates
Instead of investing in PPLI/PPVA (or iCOLI),
New York City resident invests directly in a hedge fund with 8.5% return: Tax
- approx. 52%1
New York City resident invests directly in a hedge fund of funds with 8.5%
return: Tax – approx. 51%-63%2
Pension Plan invests directly in a hedge fund that generates UBTI: Tax -
35% + state and local taxes
Insurance Company invests directly in a hedge fund: Tax - 35% + state and
local taxes
1 Assumes 75% ordinary/STCGs and 25% LTCGs, and non-trader status
2 Assumes 100% ordinary income, trader and non-trader status
11
No Investor Control
A policy owner may exercise only limited control over
investment decisions
A policy owner may not discuss the quality or rate of
return of any investment or group of investments with the
investment manager
There must be no prearranged plan to select any
individual investment (e.g., stock, bond, publicly available
mutual fund or “publicly available” hedge fund)
12
Investment Options Must Be Diversified
Diversification -- General Rule
• An investment account will be considered diversified if:
1 investment represents no more than 55% of account value
2 investments represent no more than 70% of account value
3 investments represent no more than 80% of account value
4 investments represent no more than 90% of account value
13
IDFs – Insurance Dedicated Funds
Permissible Investors: Separate accounts of US insurance
companies and so-called 953(d) electing non-US insurance
companies, pension plans, 529 plans and “compliant” seed
investments of investment managers
An IDF must differ in certain aspects from a manager’s existing
publicly-available fund in order to protect against “substance
over form”
IDFs allow policyholders to select specific funds without
causing “Investor Control” violations
The investments held by an IDF that is treated as a partnership
for tax purposes are measured individually for diversification
14
Estate Planning and Charitable Giving
The role of PPLI in estate planning
• Using properly designed trusts can remove the death benefit from
the estate tax and GST tax systems
• The PPLI policy becomes an efficient family “bank” through the
ability to borrow funds from the policy on a tax-advantaged basis
• Given the structure of the PPLI policy and the drastically increased
investment options, PPLI has now become a feasible alternative
investment vehicle for estate tax mitigation or wealth creation
• Consider whether a MEC or non-MEC policy structure should be
used
15
Estate Planning and Charitable Giving (cont.)
The role of PPLI/PPVA in charitable giving
• Using charitable lead annuity trusts (CLATs) with PPLI to
help address large one time receipt of funds or
redomestication of funds
• Using a grantor CLAT provides a vehicle to fund charitable
goals over time but gives the donor an upfront income tax
charitable deduction
• PPLI addresses the downside of grantor CLATs
16
Henry Bregstein
Partner, Financial Services
Katten Muchin Rosenman LLP
Henry Bregstein is the global co-chair of Katten Muchin Rosenman LLP’s Financial Services practice and
a member of the firm's Board of Directors. Henry is frequently mentioned in the media and lauded by
clients and colleagues alike for his work representing fund clients. He has been recognized by a number of
hedge fund and investment industry rankings and publications, including Chambers Global 2015, where
clients commented that he has "a wealth of experience in hedge fund matters," and in the 2014 edition of
Chambers USA, which describes him as "one of the smartest lawyers in the business." Henry was also
recognized by The Legal 500 as a Leading Individual for Investment Funds. Additionally, he was named
the “Distinguished Business Law Practitioner in Residence” at Widener University Commonwealth Law
School.
Largely considered an innovator in his field, Henry holds two patents and has one patent application
pending. He was granted a patent for a multi-level leverage account structure, allowing multiple classes of
investors with differing leverage objectives to establish an investment structure that takes advantage of
both the master-feeder structure and the reverse master feeder structure with segregated accounts in the
same master fund. Henry's pending patent application involves a tax-deferred fund in which investors can
obtain exposure to variable annuities and life insurance policies in a hedge fund structure with income tax
deferment or elimination.
Private Placement Insurance and Variable Annuities
Related to his private placement insurance and annuities practice, Henry advises US and non-US hedge
and private equity funds and their advisers and principals, life insurance companies, banks, broker-dealers,
insurance-dedicated fund platforms, high net worth individuals, other law firms, registered investment
advisers (RIAs), wealth advisory firms and family offices on regulatory, securities, insurance, tax, finance,
licensing, corporate and other legal matters.
Henry provides guidance on fund formation and regulatory compliance and advice related to domestic and
offshore insurance-dedicated hedge funds and funds of funds (IDFs), IDF platforms and TDF platforms—
including those related to bank-owned (BOLI), corporate-owned (COLI) and insurance company-owned
(iCOLI) life insurance products. In this capacity, he counsels clients on the structure and documentation of
IDFs (including on diversification under section 817(h) of the US internal Revenue Code, the "investor
control doctrine" issues and other tax matters), privately placed variable life insurance (PPLI) and
annuities (PPVA), insurance-dedicated swaps (IDSs) and on other insurance-related products, as well as
on regulatory matters such as compliance with state and Financial Industry Regulatory Authority (FINRA)
rules concerning the offer and sale of PPLI/PPVA.
17
Speaking Engagements and Presentations
Presenter | Creating an IDF | Presenter | What is the Investor Control Doctrine? | 2016 Private Placement Life Insurance &
Variable Annuities Forum | Boston, Massachusetts (May 17–18, 2016)
Presenter | What is the Investor Control Doctrine? | 2016 Private Placement Life Insurance & Variable Annuities Forum |
Boston, Massachusetts (May 17–18, 2016)
Moderator | Alternative Investing Through Private Placement Life Insurance and Variable Annuities | Wells Fargo Prime
Services' On The Horizon Conference Series: Alternative Investing Through Private Placement Life Insurance and Variable
Annuities | New York, New York (February 24, 2016)
Moderator | Tax-Efficient New Products for Sophisticated Investors, Family Offices and Alternative Asset Managers | New York,
New York (November 17, 2015)
Panelist and Moderator | Raising Assets for an Insurance Dedicated Fund | Panelist and Moderator | Structuring and
Distributing IDFs with Illiquid Alternative Investments | 13th Annual Private Placement Life Insurance & Variable Annuities
Forum | Boston, Massachusetts (June 16–17, 2015)
Presenter | Advanced Strategies and Insights: Overcoming Hurdles to Broad Distribution of PPLI/PPVA | 12th Annual Private
Placement Life Insurance & Variable Annuities Forum | Boston, Massachusetts (June 3–4, 2014)
Panelist | 11th Annual Private Placement Life Insurance & Variable Annuities Forum—Tax-Efficient Investing for the High Net
Worth Market | National Harbor, Maryland (June 13–14, 2013)
Panelist | Innovative Distribution Models: Which Are Working and Which Are Not | Private Placement Life Insurance (PPLI) and
Annuities (PPVA) 2013 | London, United Kingdom (April 30, 2013)
Panelist | Bringing the IDF to Clients: What Works and What Does Not? | 10th Annual Private Placement Life Insurance and
Annuities Conference | Chicago, Illinois (May 30, 2012)
Katten Muchin Rosenman LLP Locations
Katten refers to Katten Muchin Rosenman LLP and the affiliated partnership as explained at kattenlaw.com/disclaimer.
Attorney advertising. Published as a source of information only. The material contained herein is not to be construed as legal advice or opinion. www.kattenlaw.com
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August 22, 2016
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