Despite recent volatility in the US stock market, rising costs of inflation, and Russia’s invasion of Ukraine, there are still ways to control the taxes you pay on your investments and the taxes your family will pay when you won’t be here anymore. . A tool used by wealthy families for several decades allows the deferral of federal and state income taxes on investment portfolios. This tool, known as Private Placement Life Insurance (PPLI), is made up of your investment portfolio and an insurance component designed to provide the minimum amount of insurance protection at the lowest cost, allowing maximum tax benefits.
A PPLI policy can be structured to include stocks and bonds, hedge funds and private equity funds. Section 7702 of the Internal Revenue Code allows the cash value of the PPLI policy to grow free of income tax. Additionally, if the PPLI policy is owned by an irrevocable trust, the portfolio life insurance benefit may potentially escape federal estate tax, the maximum rate of which is 40%.
Investment portfolios often consist of tax-inefficient investments. An example is an alternative investment such as private credit which pays a current return. In places like California and New York, investors in high tax brackets would give up 50% of their return. In contrast, in a PPLI structure, tax is deferred and potentially eliminated, allowing money to grow and accumulate much faster. Moreover, some of these investments are not directly correlated to the stock market.
Some individuals have adapted to the current market volatility by repositioning their assets and avoiding taxes on their portfolio in the future. In certain situations, the recent market correction opens the possibility of reaping a tax loss, creating a tax deduction for the current year and positioning these investments in the future so that they are not subject to tax. federal and state income. Most policies are designed to require a dollar amount to be paid each year over a series of years. This can be advantageous when the markets are volatile, as it forces the dollar cost averaging.
Some advisors describe this approach as creating a rainy day fund. Fund growth is maximized by setting it aside and allowing it to grow and compound tax-free. Then, should the need arise, there are various ways to access the fund without triggering taxes. Having this separate bunker of tax-advantaged investments can create an extra layer of security and peace of mind without being subject to the limitations of a typical life insurance policy.
PPLI can be a good choice for people who prefer to tailor the investment options of the PPLI to suit their needs and desires over what is normally dictated by an insurance company. PPLI can also reduce insurance costs and, in some cases, eliminate the need for typical life insurance products for many families. Although the PPLI can mitigate certain taxes, it is important to remember that the PPLI is first and foremost life insurance.
The recent volatility caused by world events should be a call to action for individuals to consider alternative planning options. Beyond the PPLI, a reset in the value of any investment can be a good time to consider many types of estate and tax planning techniques and other strategies. One of the most effective ways to protect yourself and your wealth is to work with your trusted advisors to test a variety of outcomes for your investments and overall planning to ensure you are set to achieve the results you want. and that you don’t miss any opportunity.