PPLIs is a sophisticated tool, and there are some caveats that are important to be understood and taken into consideration during the implementation and maintenance phase:
Transfer taxes may apply when you employ a premium in kind, in other words if your premium is, fully or partially, made up of investments, e.g. a portfolio of stocks and bonds, rather than merely cash. The transfer is then treated as a sales transaction and may, therefore, be subject to capital gains taxation.
Income taxes and capital gains taxes can be avoided with PPLI. However, PPLI per se is not an estate tax planning tool. To avoid estate taxes, you need to remove assets from your estate, for example by gifting assets to a trust. The trust then may own a PPLI policy for income tax planning purposes.
Compliance with the US tax code is required to reap the tax benefits of PPLI. Tax benefits may be at risk if a non-compliant policy contract is used, or if certain rules are not followed. The pertinent rules are the following:
Investor control restrictions: There has to be a clear separation between the investor and the actual investment of the funds. The funds belong to the insurer for the benefit of the policy. As such, it is the insurer who ultimately decides on elements such as the investment manager and strategy chosen. The investor can always provide its preferences when it comes to institutions (e.g. banks and asset managers) for approval of the insurer, and the investment strategy can also be selected. However, the investor shall not be the one directly buying and selling the policy assets or influencing the asset manager in his investment decisions.
Diversification requirements: The investments in the policy contract must comply with certain diversification requirements. It must be “adequately diversified”, meaning that the policy accounts must contain at least five different investments in a particular percentage formula. This is generally not a problem with a properly and well diversified portfolio.
Reporting rules: Generally, the rules you are subjected to will not change merely by placing your assets abroad. Your domestic tax and reporting rules will continue to apply, only now in an international context. PPLI reporting obligations are actually quite simply and generally reduced reporting requirements apply if compared to holding the investments outright. Currently, for US individuals all that is required is the annual FBAR and Form 8938. The information for the same is made available to the investor by the carrier and in many times by BFI.
Travel may be necessary. Generally, offshore PPLI products are not registered with the respective insurance commissions in the US. Therefore, they must be offered in a private placement context . Therefore, based on the insurance rules in the US, detailed PPLI discussions and applications generally will need to be conducted outside of the US. Beyond the legal requirements, we consider it best practice to meet face to face.
Competent advice required! The multi-jurisdictional context and multitude of planning options calls for professional guidance. Independent, experienced advice is recommended.
Insurance companies tend to be administrative creatures, especially in the set-up stages; this sometimes requires a big dose of patience. A experienced partner with established connections to the providers is beneficial. BFI Consulting has over 20 years of expertise in advising private individual and families, and consulting institutional clients on the different matters that surround PPLI, and has developed an expertise on the needs and requirements of investors with US connections.