Wealthy individuals and families who are interested in investments that are tax-efficient are more commonly drawn to Private Placement Variable Annuity (PPVA) and Private Placement Variable Universal Life (PPVUL) Investment Accounts. There are typical investment planning reasons for using of these types of accounts.
Private Placement Variable Annuity Investment Accounts
In order to defer income tax on investment gains, many investors will use a PPVA. As with an investment account, an investor can deposit and withdrawal from their PPVA. There is a 10 percent excise tax imposed on any gains that are dispersed from the PPVA before the beneficiary’s age 59 ½. After this age, any gains from the PPVA Investment Account are taxed as ordinary income on distribution.
There is some flexibility with a PPVA. Owners can make deposits, change the beneficiary designation, and adjust the allocation of assets to various investment options. There are some drawbacks in that a PPVA does not have income guarantees or principal protection. But, this means that the fees are lower than a traditional annuity. In addition, a PPVA allows owners to invest their money in non-registered investment offerings, like hedge funds.
Those Who Utilize PPVA Investment Accounts
Many affluent people who are going to leave money or assets to a private foundation or public charity on their passing use a PPVA Investment Account. They prefer this type of account due to the flexibility to change the beneficiary of the PPVA Investment Account. Individuals or family members can access the assets while the owner is alive.
Private Placement Variable Universal Life Investment Accounts
PPVUL Investment Accounts contains an investment account and a death benefit. Investing at the owner’s discretion, the cash value in a PPVUL can be put into registered or non-registered fund options. The gains made by the investments are income-tax free as long as the life insurance policy stays in place.
The PPVUL owner can make withdrawals on the policy up to the amount that has been deposited into the PPVUL or they can take a loan from the account. When the insured dies, the investment gains are similarly to an insurance policy where the beneficiaries receive a tax-free insurance benefit.
Large trusts often utilize PPVUL Investment Accounts. Many times, portions of assets that are in trust, are invested in inefficient investment strategies that do not utilize the tax benefits afforded the PPVUL. As a trustee, one of the responsibilities in managing a trust is to find these tax-inefficient investments and transferring them to a PPVUL Investment Account. A trustee still has the flexibility to distribute the funds to the insured, either by withdrawal or loan from the value of the investment account.
The Basic Process of PPVA and PPVUL Investment Accounts
The basic set up for a PPVA Investment Account is similar to a hedge fund subscription and can be set up through a licensed insurance broker. After providing evidence of insurability by a physical, a simple life insurance underwriting process is completed for PPVUL Investment Accounts.
Investment between a variety of registered and non-registered investment vehicles, the owner of the PPVA or PPVUL Investment Account can obtain a list of funds available from each life insurance company. If the deposit will be $50 million or greater, a request for a fund manager may be made.
The Downsides to PPVA and PPVUL Investment Accounts
All deferred gains are taxed as ordinary income when withdrawn on PPVA Investment Accounts. Usually saved for the most inefficient portion of an individual’s overall portfolio, these high-net-worth individuals suffer ordinary income tax rates if withdrawals come from a PPVA Investment Account instead of the normal treatment for Long Term Capital Gain funds.
If an investor is looking for an account similar to a hedge fund, they should stay away from the PPVA and PPVUL Investment Accounts. Since hedge fund accounts focus on short term gains and suffer from regular tax income rules, when finding a way to defer premium Federal and State taxes, the timeline for investment should be longer than 10 years. With fewer investment options than other available investment structures, an investor that wants a large range of investment options to choose from, should consider investments other than PPVA or PPVUL Investment Accounts.
Benefits for PPVA and PPVUL Investment Accounts
For investors that are tax-sensitive, those seeking to invest in funds generated from hedge funds may want to consider PPVA and PPVUL Investment Accounts. When looking for ways to maximize their charitable giving power, the tax-free compounding feature connected with a PPVA Investment account is appealing. Assets designated to a charitable entity or private foundation are income and estate tax-free.
PPVUL Investment Accounts are definitely more complicated to implement, but are worth the work, especially for accounts owned within large, dynastic trust structures. Income tax-free access to any accumulated value inside the account is allowed for the insured. The insurance benefit is also tax-free upon the passing of the insured.
For those individuals who are in the high-income bracket and intend to retire to a lower-tax area, a PPVA Investment Account can be beneficial. For example, an individual based in Pennsylvania who plans on retiring to Florida can defer the income tax on the gains from their investments until they move to an area with a lower tax rate. Then they would take distributions from the PPVA and pay a lower tax rate.
No matter which account is chosen, only an expert should be consulted in advising and implementing the ins and outs of PPVA and PPVUL Investment Accounts.