Offshore Private Placement Life Insurance Dynasty Trust – Financing Through Multiple Grantors
Private Placement Life Insurance (PPLI) typically requires a minimum premium commitment of $1 million or more. By pooling their available assets, two or more grantors of (ie, contributors to) an irrevocable life insurance trust (ILIT) can meet the minimum premium commitment of a PPLI policy. The insured may be one of the grantors, but need not be.
Through the creative wording of the trust document, an ILIT (also known as a dynasty trust) can provide for multiple grantors (contributors) and multiple beneficiaries. Each of the grantors allocates part of their lifetime gift and estate tax exemption and generation-skipping transfer tax (GSTT) exemption to cover their contribution to the trust.
A tax-efficient method of building wealth in a dynasty trust is the purchase of a private placement life insurance policy (PPLI) that serves as an “insurance wrapper” around the investments. As a result, the investments grow tax-free for the life of the insured and, upon the death of the insured, the proceeds are paid into the trust free of estate taxes. PPLI is especially useful for holding short-term, tax-inefficient investments like hedge funds, as well as long-term, high-growth investments like venture capital and start-ups.
National insurance companies offering PPLI in the US generally require a minimum insurance premium commitment of $10 million to $50 million. Offshore insurance companies are more flexible, but still look for a minimum premium commitment of around $1 million. This means that many potentially interested individuals or married couples from the economic middle class simply cannot enjoy the same tax and investment advantages as wealthy individuals.
In a typical PPLI dynasty trust scenario, an individual wealthy grantor contributes several million dollars in cash or property to an offshore asset protection dynasty trust, and the trust purchases PPLI during the grantor’s lifetime. However, if the grantor cannot pay at least one million dollars, PPLI cannot be purchased.
Conversely, when multiple grantors contribute assets to a single dynasty trust, the trust is more likely to have sufficient funds to purchase an offshore PPLI policy. For example, three hypothetical grantors could each contribute $400,000 in assets to a dynasty trust. With $1.2 million of assets, the dynasty trust could buy a PPLI policy abroad, insuring the life of a suitable person. Assets within the PPLI wrapper grow free of income and capital gains taxes. When the insured dies, the trust receives the policy proceeds free of income and estate taxes, and the beneficiaries receive the trust’s benefits free of estate and GSST taxes in perpetuity.
PPLI’s greater investment flexibility compared to conventional life insurance is the ability to invest policy proceeds in high-yielding assets, such as hedge funds or start-ups. Another important advantage of offshore PPLI is the ability of the insurance buyer to make premium payments in kind. For example, if one or more grantors contribute stocks, bonds, or business interests to the trust, then the trust may fund the PPLI policy with in-kind assets rather than cash.
In some circumstances, each of several grantors (contributors) will have their own ideas about how to design a discretionary, irrevocable asset protection dynasty trust and will bring their own list of beneficiaries. Consequently, the design and implementation of a multi-grantor trust works well when the grantors have common interests and common goals, as might exist among family members. Presumably, the number of beneficiaries increases with the number of grantors, so the benefits of the trust could be diluted. On the other hand, since more grantors means more initial contributions and larger trust assets, these factors should be balanced. In any event, since the trustee(s) of a dynastic trust must possess substantial discretionary authority to achieve asset protection, a rigid allocation of benefits among beneficiaries is generally not desirable.
The grantors (contributors) of a discretionary and irrevocable PPLI dynasty trust can benefit (at the discretion of the trustee) from the assets of the trust. As investments in the PPLI wrapper grow tax-free, beneficiaries (including grantors) can benefit from tax-free loans from the PPLI policy to the trust. Upon the death of the insured, the trust receives the insurance proceeds tax-free. The trust could then purchase another PPLI policy to continue to grow the investment tax-free.
By contributing to a multi-grantor dynasty trust that then buys and owns PPLI overseas, people in the economic middle class can now utilize a tax-saving, wealth-building, and asset-protection technique generally available only to the wealthy. .
Warning and Disclaimer: This is not legal or tax advice.
Copyright 2010 – Thomas Swenson