1

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

AUSTIN

One Congress Plaza

111 Congress Avenue

Suite 1000

Austin, TX 78701-4073

+1.512.691.4000 tel

+1.512.691.4001 fax

HOUSTON

1301 McKinney Street

Suite 3000

Houston, TX 77010-3033

+1.713.270.3400 tel

+1.713.270.3401 fax

LOS ANGELES –CENTURY CITY

2029 Century Park East

Suite 2600

Los Angeles, CA 90067-3012

+1.310.788.4400 tel

+1.310.788.4471 fax

ORANGE COUNTY

100 Spectrum Center Drive

Suite 1050

Irvine, CA 92618-4960

+1.714.966.6819 tel

+1.714.966.6821 fax

WASHINGTON, DC

2900 K Street NW

North Tower - Suite 200

Washington, DC 20007-5118

+1.202.625.3500 tel

+1.202.298.7570 fax

CHARLOTTE

550 South Tryon Street

Suite 2900

Charlotte, NC 28202-4213

+1.704.444.2000 tel

+1.704.444.2050 fax

IRVING

545 East John Carpenter Freeway

Suite 300

Irving, TX 75062-3964

+1.972.587.4100 tel

+1.972.587.4109 fax

LOS ANGELES – DOWNTOWN

515 South Flower Street

Suite 1000

Los Angeles, CA 90071-2212

+1.213.443.9000 tel

+1.213.443.9001 fax

SAN FRANCISCOBAY AREA

1999 Harrison Street

Suite 700

Oakland, CA 94612-4704

+1.415.293.5800 tel

+1.415.293.5801 fax

CHICAGO

525 West Monroe Street

Chicago, IL 60661-3693

+1.312.902.5200 tel

+1.312.902.1061 fax

LONDON

Paternoster House

65 St Paul’s Churchyard

London EC4M 8AB United Kingdom

+44.0.20.7776.7620 tel

+44.0.20.7776.7621 fax

NEW YORK

575 Madison Avenue

New York, NY 10022-2585

+1.212.940.8800 tel

+1.212.940.8776 fax

SHANGHAI

Suite 4906 Wheelock Square

1717 Nanjing Road West

Shanghai 200040 P.R. China

+86.21.6039.3222 tel

+86.21.6039.3223 fax

121149263_1

August 22, 2016