Tax-Efficient Investing Using Private Placement Variable Life Insurance and Annuities

Abstract

The authors start by observing that many hedge funds and managed accounts have impressive before-tax returns, but that their returns may not be as impressive on an after-tax basis. Though tax planning for hedge funds and other investments can improve after-tax returns, recent changes in the tax law, such as the constructive sales rules, have made tax-deferral more difficult. They indicate that one method to defer hedge fund taxable income and convert it to long-term capital gain (investing in the fund through a derivative such as a total return swap) has significant task risks of being disallowed and is the target of proposed legislation in Congress. They then turn to the idea that private placement variable life insurance has the potential of eliminating income tax on hedge fund and other earning and, with proper estate planning, eliminating estate tax as well. They discuss private placement variable life insurance and annuities, the income tax savings, asset protection, and estate planning benefits of such policies, how the insurance can be used as part of an overall long term investment strategy, which investors should consider the policies, and a comparison of United States and offshore policies.