Multiplying the Value of ISOs and Public and Privately Held Stock Through Customized  Private Placement Life Insurance and Annuities

Multiplying the Value of ISOs and Public and Privately Held Stock Through Customized Private Placement Life Insurance and Annuities

The President and CEO of Private Risk Capital Development Advisors discusses wealth protection during the coronavirus era.

Since the beginning of 2000, high-net-worth families and C-Suite executives have worked with the world’s leading law firms in developing custom designed variable universal life insurance and annuity policies to provide a more complete life insurance solution for their families and selected charities. Today, this solution begins to trend among young entrepreneurs and executives who are looking to proliferate their portfolios, not only to benefit their families, but also to finance their legacy and philanthropic ventures. These customized insurance policies are frequently funded with a combination of cash and certain non-cash assets which can include interests in private or public equities, real property, hedge funds, artwork, aircraft, and qualifying majority owned entities via in-kind contribution.

Overview of In-Kind Premiums

Many tax and life insurance practitioners are unaware that assets which are difficult to value, often referred to as “non-bankable assets” or “in-kind” premiums, are readily accepted by life insurance companies whose primary market focus is on high-net-worth clients seeking bespoke client-centric life insurance protection plans. These assets broadly range from equity and option interests in private or public business entities to real estate holding companies. For this reason, advisors and their clients miss a variety of the tax planning solutions that can lead to greater protection and significantly greater tax-advantaged wealth accumulation during the lifetime of the policyholder.

[To read more of Bradley Barros’s thought leadership click here]

To elaborate, when purchasing life insurance, the term “premium” represents the total amount of required currency and other considerations, excluding interest on policy loans, that are paid in exchange for the issuance of a life insurance policy and its benefits. The in-kind or non-cash premiums become part of the policy’s cash value within the bespoke life insurance policy and are then invested within the policy, which receive the same tax treatment as any other asset would when held within a compliant policy, as recently determined under an IRS private letter ruling. Additionally, the National Association of Insurance Commissioners (“NAIC”) follows this long-standing acceptance of in-kind assets for both casualty and life insurance policies. It even goes even further by avoiding any specifically enumerated definition of Premium and In-Kind Premiums within their publications and issuances of regulatory guidance.

What once was the exclusive domain of billionaires is now utilized by successful business executives and entrepreneurs of all types, including large real estate holders and private equity investors.

Further, following the death of an insured, it is common for a customized private placement life insurance policy to distribute in-kind holdings from the policy’s cash value as part of the policy’s death benefits. By circumventing probate and transferring interests to beneficiaries on a tax-free basis, the bespoke life insurance policy is not only efficient but also prudent. 

Also, from a tax perspective, it is important that the investment policy statement that governs the investment holdings within the bespoke life insurance policy be sufficiently broad, and that no prior agreement (expressed or implied) exists between the policyholder and his or her investment advisor regarding the continued holding of the contributed assets placed within the policy investment/cash value account basket. Proper valuation and maintenance of a diversified portfolio of policy investments is the key metric for a compliant bespoke life insurance policy within the meaning of Section 817(h) of the Internal Revenue Service Code and the applicable Treasury Regulations. 

[For more on Private Risk Capital’s approach to life insurance, click here]

A Small Group of Experts – Finding a Diamond in the Rough

The private placement life insurance (PPLI) marketplace is a niche marketplace with a small and finite number of sophisticated advisors to manage transactions involving in-kind premiums. To benefit from customized PPLI policies, high-net-worth entrepreneurs, executives and investors need to find attorneys, insurance advisors and an insurance carrier with the sophistication and expertise to handle curated in-kind premiums.

The good news is that there are firms such as Private Risk Capital Development Advisors, LLC who are proficient at designing customized life insurance solutions for C-Suite executives and modern affluent professionals who have a net-worth below 10 figures. What once was the exclusive domain of billionaires is now utilized by successful business executives and entrepreneurs of all types, including large real estate holders and private equity investors. 

PPLI carriers that have the in-house expertise to develop curated policy designs work hand in glove with clients and their financial advisors to ensure that all aspects of the in-kind premium transfer and policy ownership – including (1) the proper valuation of in-kind assets, (2) the adherence to doctrinal requirements, (3) the existence of suitable investment diversification, and (4) the designation and assignment of economically priced mortality coverage – are competently and effectively administered to provide a tax-compliant bespoke life insurance policy.

Conclusion

The bespoke PPLI marketplace offers high-net-worth individuals a product that features investment customization and institutional pricing, both unaccounted for in the retail life insurance market.  The flexibility to make in-kind premiums is an additional feature that neither exists in retail life insurance, nor in standard PPLI policies manufactured by large financial institutions in order to sell packaged funds. This flexibility permits a prospective policyholder to fund a policy with a low-basis capital asset that has the potential for substantial capital appreciation while within the tax-advantaged environment of a bespoke life insurance policy. The ability to witness a considerable capital gain mature in a tax-free environment should cause all high-net-worth entrepreneurs, executives and investors to evaluate and reconsider their existing life insurance policy and investment tax planning. 


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