Reducing Investment Taxes

Background. The key to eliminating taxes on your investments is holding the investments in a tax-free vehicle. We are all familiar with IRA accounts, where no taxes are paid while the investments are inside the IRA. 

Life Insurance.  Another well known tax-free vehicle is life insurance. It is possible to hold an investment portfolio inside a life insurance policy, hence there are no taxes on the investments. A common example of this is a variable annuity, where mutual funds are held inside a life insurance policy. Here, there are no taxes on the income or the gains in the investments. 

Private Placement Life Insurance.  Private Placement Life Insurance applies the tax-free features of life insurance to a more customized investment portfolio. Here, you begin with the investment portfolio, and build around it a life insurance “wrapper”. The policy provides the least amount of life insurance to obtain the tax-free benefits. This makes the cost of the insurance dramatically lower than traditional policies. The only other cost is the investment management fee that you would otherwise pay. The net result can be much more favorable long-term returns vs. portfolios subject to taxes. 

Caveats.  Private Placement Life Insurance is not for everyone. Here are few important things to keep in mind. First, the minimum contribution is typically at least $1,000,000, in cash. Second, because these are limited offerings not sold in the retail markets, they can only be used by wealthy individuals who are “qualified purchasers” under the securities laws. Third, the real power of the strategy lies in long-term investment at the tax-free rate.  The strategy is ideal for long-term portfolios for children and grandchildren, but not for money you will need to spend in the near future. Finally, there can be no  “investor control” of the portfolio inside the Private Placement Life Insurance policy. You can pick a money manager, and discuss the overall strategy, but you cannot be involved in the selection of individual stocks and bonds. 

Do you have cash or investment funds that you do not need during your lifetime, and where you would like to maximize the investment return by eliminating taxes? Please contact us to learn how Private Placement Life Insurance can help you.