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Investor Control & the Private Placement Life Insurance Market: Truths, Half-Truths and Falsehoods



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Private Placement Life Insurance (“PPLI”) and Private Placement Variable Annuities (“PPVA”) have evolved from exotic to mainstream. Increased familiarity in the professional community and the proliferation of Insurance-Dedicated Funds (“IDFs”) have sparked industry growth of PPLI/PPVA which are broadly utilized income tax and estate planning strategies for ultra-high net worth families and family offices. The growth in the number of registered and non-registered investment options has grown dramatically with nearly 200 non-registered and 400 registered investment options, across a wide range of investment strategies, available today. SALI Fund Services, the largest administrator of IDFs, reports that on average over the last five years, they have received 750 annual subscriptions—of which 85% of the allocations are less than $2MM.

As the interest has increased, some have entered the market without the nuanced attention to the legal and regulatory framework under which the private placement market developed and has flourished. Although these issues are diverse and complex, the one that is often misunderstand and critically important to the sustainability of the industry is the “investor control doctrine.” While the vast majority of PPLI and PPVA is structured to be fully compliant, there are some rogue and aggressive actors that blatantly disregard the rules. Indeed, two recent cases, Webber v. Commissioner and Wegbreit v. Commissioner, are textbook examples of violations of the investor control doctrine that negate the benefits of PPLI and PPVA and are detrimental to the sustainability of the market.

Despite wide-spread market recognition of these cases (and the disastrous implications for the associated taxpayers), and the core participants in the market staying well within spirit and letter of the rules, a small set of upstart market participants have been promoting aggressive PPLI/PPVA strategies. These strategies are often being promoted to less sophisticated, less mature segments of the market utilizing aggressive, misleading and false claims about what is permissible within the contours of investor control. 

In their exclusive LISI Webinar, nationally recognized experts Eric Naison-Phillips and Scott Bowman will review some of the common misconceptions in the marketplace today regarding PPLIU/PPVA and IDFs. Some of the topics Eric and Scott will cover in their content-packed webinar include the following: 

·       Can an independent manager of an IDF buy assets from policyholder, or can a policyholder pay premium “in kind”?

·       Can policyholders allocate and reallocate among existing IDFs at the policyowner’s discretion?

·       Can a registered investment advisor or investment manager create a custom mandate IDF for policyholders?

·       Can an investment manager create and manage an IDF for a related policyholder?

·       Can a passive equity owner of an investment management firm may invest in an IDF managed by the same investment management firm?

·       Can An active manager of a private investment fund invest through a non-grantor trust in an IDF managed by the manager’s private investment fund?

Scott A. Bowman is a Partner with McDermott Will & Emery. His practice focuses on providing personal tax and estate planning counseling to wealthy individuals and families, advising them on structuring their wealth to minimize income, estate, gift and generation-skipping transfer taxes over multiple generations. He advises on trustee and family governance structures throughout the estate and trust administration process to preserve business enterprises and manage potentially sensitive family circumstances. Scott is experienced in handling international aspects of tax and estate planning for multi-national families, advising non-US citizens who are considering immigrating to the United States, investing into US financial and real estate markets or transferring wealth to US beneficiaries by gift or inheritance. Scott also advises US clients living or investing abroad and with regard to US expatriation.

Eric Naison-Phillips is a Principal of Winged Keel Group and a member of the firm’s Executive Management Committee.  He joined Winged Keel as a Client Relationship Associate in 2003, advancing into the role of Director of Portfolio Design before becoming a Principal in 2009.  Actively focused on structuring, implementing, and servicing life insurance portfolios designed to meet the unique needs of ultra-affluent families, Eric’s area of expertise is in the complex application of both Traditional and Private Placement Life Insurance arrangements.

A frequent speaker, Eric has presented on the topics of Private Placement Life Insurance (PPLI), Private Placement Variable Annuities (PPVA), Insurance-Dedicated Funds (IDFs), and the advanced applications of traditional life insurance at industry conferences, hedge fund round-tables, private family office events in New York and San Francisco, and at the 2016 Robin Hood Investors Conference.  He served as the Conference Chairman of the 11th Annual Private Placement Life Insurance & Variable Annuities Forum in 2013, and has also served on the Board of Directors of M Financial Group, one of the nation’s premier insurance design and distribution organizations for ultra-affluent clientele.  He has co-authored articles on the impact of rising interest rates on guaranteed life insurance products, the use of term insurance as a liquidity hedge, and on charitable applications of PPVA Accounts for the online journals of Trusts & Estates and Financial Advisor magazines.

Winged Keel Group is independently owned and operated. Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC.  The tax and legal references discussed are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that Winged Keel Group is not engaged in rendering tax or legal services. A Private Placement Life Insurance (PPLI) Account and Private Placement Variable Annuity (PPVA) Account are unregistered securities products and are not subject to the same regulatory requirements as registered products.  As such, a PPLI Account and PPVA Account should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933. Variable annuities are long-term investments designed for retirement. The value of the investment options will fluctuate and, when redeemed, may be worth more or less than the original cost. Withdrawals and other distributions of taxable amounts, including death benefit payments, will be subject to ordinary income tax. If withdrawals and other distributions are taken prior to age 59 1/2 a 10% federal penalty may apply. A withdrawal charge may also apply. Withdrawals will reduce the value of the death benefit and any optional benefits. 

 

 

 

 

 


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Eric Naison-Phillips is a Principal of Winged Keel Group. He joined the firm as a Client Relationship Associate in 2003, advancing into the role of Director of Portfolio Design before becoming a Principal in 2009. Actively focused on structuring, implementing, and servicing life insurance portfolios designed to meet the unique needs of ultra-affluent families, Eric also serves as a member of Winged Keel Group's Executive Management Committee. Eric has served as a member of M Financial Group's Product Management Advisory Committee and, in 2013, as the Conference Chairman of the 11th Annual Private Placement Life Insurance & Variable Annuities Forum. A frequent presenter, he has addressed offshore opportunities and overviews of the state of the PPLI and PPVA market at industry conferences, hedge fund round-tables, and private family office events in New York, San Francisco, and at the 2016 Robin Hood Investors Conference. He has also co-authored articles for the online journal of Trusts & Estates and Financial Advisor magazine on uses of term insurance as a liquidity hedge and on charitable applications of PPVA Investment Accounts.



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