Pooling Resources to Achieve Financial Goals
Private placement life insurance (PPLI) typically requires a minimum premium commitment of $1 million or more, placing it out of reach for many individuals. However, by combining their resources, multiple grantors (contributors) to an irrevocable life insurance trust (ILIT) can collectively meet the minimum premium requirement and reap the benefits of PPLI.
Harnessing the Power of Irrevocable Life Insurance Trusts
An ILIT, also known as a dynasty trust, can be structured to accommodate multiple grantors and beneficiaries. Each grantor allocates a portion of their lifetime gift and estate tax exemption, as well as their generation-skipping transfer tax (GSTT) exemption, to cover their contribution to the trust.
Tax-Efficient Wealth Building with PPLI
A PPLI policy serves as an "insurance wrapper" around investments, allowing them to grow tax-free during the insured's lifetime. Upon the insured's passing, the proceeds are paid to the trust free of estate taxes. PPLI is particularly advantageous 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 companies.
Overcoming Minimum Premium Requirements
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 middle-class individuals or married couples are unable to access the same investment and tax advantages as wealthy individuals.
The Multi-Grantor Solution
In a typical PPLI-dynasty-trust scenario, a single wealthy grantor contributes several million dollars in cash or assets to an offshore asset protection dynasty trust, and the trust purchases PPLI on the grantor's life. However, when multiple grantors contribute assets to a single dynasty trust, the trust is more likely to have sufficient funds to purchase an offshore PPLI policy.
Illustrative Example
Consider three hypothetical grantors who each contribute $400,000 worth of assets to a dynasty trust. With $1.2 million in assets, the dynasty trust could purchase an offshore PPLI policy, insuring the life of an appropriate individual. Assets within the PPLI wrapper grow free of income and capital gains taxes. Upon the insured's passing, the trust receives the policy proceeds free of income and estate taxes, and beneficiaries receive trust benefits free of estate and GSST taxes in perpetuity.
Enhanced Investment Flexibility
A significant advantage of PPLI compared to traditional life insurance is the ability to invest policy funds in high-return assets, such as hedge funds or start-up companies. Another key benefit of offshore PPLI is the ability of the insurance purchaser to make in-kind premium payments. For instance, if one or more grantors contribute stocks, bonds, or business interests to the trust, the trust can fund the PPLI policy with in-kind assets instead of cash.
Aligning Interests and Goals
The design and implementation of a multi-grantor trust work well when the grantors have common interests and shared goals, as may exist among family members. While the number of beneficiaries may increase with the number of grantors, potentially diluting trust benefits, the larger initial contributions and higher trust assets should balance these factors.
Discretionary Authority for Asset Protection
Since the trustee(s) of a dynasty trust must possess substantial discretionary authority to achieve asset protection, a rigid allocation of benefits among beneficiaries is generally not desirable. Grantors (contributors) of an irrevocable, discretionary PPLI dynasty trust may benefit (at the discretion of the trustee) from trust assets.
Tax-Free Growth and Loans
As investments within the PPLI wrapper grow tax-free, beneficiaries (including grantors) may benefit from tax-free loans of the PPLI policy to the trust. Upon the insured's passing, insurance benefits are received tax-free by the trust. The trust may then purchase another PPLI policy to continue tax-free investment growth.
Opening Doors for Middle-Class Investors
By contributing to a multi-grantor dynasty trust that purchases and owns offshore PPLI, individuals from the middle class can now utilize a tax-saving, wealth-building, asset protection strategy previously accessible only to the wealthy.