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Service Provider Spotlight: November 22, 2016

A Bet on Life or Death: Why More Investors Are Looking for Tax Advantaged Investments

By Kimberly Broder, Special Counsel, Katten Muchin Rosenman LLP

EisnerAmper‘s Service Provider Spotlight is a monthly entry to our Alternative Investments Intelligence Blog featuring service providers. If you’re interested in being featured, please contact Elana Margulies Snyderman.

For some investors, making an investment decision is more about what they take away or pass on to future generations as opposed to how much the investor may earn during the life of the investment.  Many investment choices available to high net worth individuals and family offices, as well as other types of investors, appear attractive until taxes are taken into account.  This is sometimes the case with hedge funds and private equity funds, depending on the strategy an investment manager may pursue.  Often times an investment manager could show attractive returns but if the strategy is tax-inefficient, many investors may shy away from making the investment. In addition, an attractive investment could become even more appealing if it included income tax deferral or elimination.

Investment managers are increasingly offering investors the ability to gain exposure to certain traditional but tax-inefficient strategies through insurance dedicated funds (IDFs).  An IDF is an alternative investment fund (e.g., a hedge fund, private equity fund or fund of funds) offered exclusively by life insurance companies through privately placed variable annuities (PPVA) or privately placed life insurance (PPLI).  PPVA offers taxable investors the ability to defer taxes on investment gains until distribution, death or expiration of a contract, at which time all gains are taxed at the ordinary income tax rate; while PPLI offers investors the ability to eliminate income taxes completely. 

The combination of alternative investment funds and variable products can also be seen as serving the primary investment goals of high-net-worth individuals and other types of investors. Here are a few key benefits of PPLI that investors should consider: 

  • Tax effective estate planning, including using variable products in combination with other estate planning tools (e.g., life insurance trusts) which can lead to greater tax savings.
  • Tax deferral.
  • Potential for more than ordinary investment returns/attractive returns.
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