Offshore Private Placement Life Insurance Dynasty Trust – Financing through multiple financiers

Private placement life insurance policies (PPLI) typically require a minimum premium commitment of $1 million or more. By pooling their available assets, two or more donors of (i.e., contributors to) an irrevocable life insurance trust (ILIT) can reach the minimum premium commitment of a PPLI policy. The insured can be one of the donors, but does not have to be.

By creatively drafting the trust document, an ILIT (also known as a dynasty trust) can provide for multiple donors (contributors) and different beneficiaries. Each of the donors allocates a portion of their lifetime gift and estate tax exemption and transfer tax exemption (GSTT) to cover their contribution to the trust.

A tax-friendly method of building wealth in a dynasty trust is to purchase a private placement life insurance policy (PPLI) that serves as an “insurance envelope” around investments. As a result, investments during the life of the insured become tax-free and, upon the death of the insured, the proceeds are paid to the trust free of estate taxes. PPLI is especially useful for holding tax-inefficient short-term investments, such as hedge funds, as well as high-growth long-term investments, such as venture capital and start-ups.

Home insurance companies offering PPLI in the US typically require a minimum insurance premium of $10 million to $50 million. Offshore insurance companies are more flexible, but still aim for a minimum premium commitment of about $1 million. This means that many potentially interested or middle-class couples simply cannot enjoy the same investment and tax benefits as wealthy people.

In a typical PPLI dynasty trust scenario, an individual wealthy grantor contributes several million dollars in cash or real estate to a dynasty offshore trust for asset protection, and the trust purchases PPLI on the grantor’s life. However, if the donor cannot pay at least one million dollars, PPLI cannot be purchased.

In contrast, when multiple donors 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 donors could each contribute $400,000 in assets to a dynasty trust. With $1.2 million in assets, the dynasty trust could purchase an offshore PPLI policy, insuring the life of a suitable individual. Assets within the PPLI pack 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 beneficiaries receive trust benefits without estate and GSST taxes in perpetuity.

PPLI’s greater investment flexibility compared to conventional life insurance is the ability to invest policy funds in high-return assets such as hedge funds or start-up companies. Another key advantage of offshore PPLI is the insurance buyer’s ability to make in-kind premium payments. For example, if one or more grantors contribute stocks, bonds, or business interests to the trust, the trust may fund the PPLI policy with in-kind assets instead of cash.

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In some circumstances, each of the various grantors (contributors) will have their own ideas about how to design an irrevocable, discretionary, asset protection dynasty trust and will bring their own list of beneficiaries. Accordingly, the design and implementation of a multi-donor trust function well when the donors have common interests and common goals, such as those that may exist between family members. Presumably, the number of beneficiaries increases with the number of donors, so that trust benefits can dilute. On the other hand, since more donors mean more initial contributions and more trust assets, these factors should balance. In any event, since the trustee(s) of a dynasty trust must have substantial discretion to achieve asset protection, a rigid distribution of benefits among beneficiaries is usually not desirable.

Grantors (contributors) of an irrevocable, discretionary PPLI dynasty trust may benefit (at the discretion of the trustee) from trust assets. As investments in the PPLI pack become tax-free, beneficiaries (including donors) can take advantage of tax-free loans from the PPLI policy to the trust. On the death of the insured, insurance payments are received tax-free by the trust. The trust could then purchase another PPLI policy to continue tax-free investment growth.

By contributing to a multi-grantor dynasty trust that then buys and owns offshore PPLI, economic middle-class individuals can now tap into a tax-saving, wealth-building, and wealth-protection technique generally available only to the wealthy.

Warning & Disclaimer: This is not legal or tax advice.

Copyright 2010 – Thomas Swenson