Overview of Offshore Private Placement Life Insurance (PPLI)

Offshore Private Placement Life Insurance (PPLI) Policy Reporting

Offshore Private Placement Life Insurance (PPLI) Policy Reporting

In general, most investments result in current-year tax implications when the income is generated or distributed. Stated another way, there is an immediate tax implication associated with most investment types, even if the person does not withdraw the earnings, receive any distributions — and even if the income is immediately reinvested. While tax promoters across the globe try to peddle strategies to avoid taxes on investment income, these strategies are fraught with peril. And, when tax promoters present investment strategies that claim to avoid or minimize taxes, there is a very real concern as to whether the strategy is even legal and/or qualifies as a listed transaction/reportable transaction — which has its own set of headaches and tax implications for the filer. One potential loophole that some wealthy U.S. Taxpayers can use to try to shield or avoid having to pay U.S. taxes on income until they are ready to do so is a Private Placement Life Insurance Policy. PPLI policies are hybrid death benefits/investment — and are common amongst the wealthy and ultra-wealthy. These policies provide growth within the investment policy (with more expansive investment options than a typical life insurance policy) without the typical tax implications on the growth. However, since many of these PPLIs are located in foreign countries, various other international reporting requirements may be necessary, such as the FBAR, Form 8938, Form 8621, and more. Let’s briefly look at offshore private placement life insurance policy reporting.

Life Insurance Policies (In General)

Life insurance policies can be an effective way for Taxpayers to avoid certain taxes that other non-life insurance policies are subject to, such as dividends on stock and capital gains for the sale of assets. It is important to note, that this is typically reserved for specific U.S. life insurance policies and not foreign life assurance policies.

The Senate Finance Committee provides a good summary of the basics of taxation of life insurance policies.

As provided by the Senate Finance Committee:

• • • “The first major tax advantage afforded to life insurance products is that death benefits paid under a life insurance policy are excluded from taxation.

    • The second is that the tax code allows for life insurance premiums to be invested on a tax-free basis.

    • Frequently referred to as tax-free “inside 4 buildup,” this part of the tax code allows for gains from investments made with insurance premiums to accrue over the life of a policy without being subject to taxation.

    • Earnings on assets supporting insurance policies are not taxed until they are withdrawn, and then only taxed to the extent that the amount withdrawn exceeds amounts paid in premiums.

    • Additionally, changes to the tax code in 1984 required that death benefits must exceed the cash value of insurance policies, using either the Internal Revenue Code’s cash value accumulation test or the guideline premium and cash value corridor test.”

What does this mean? 

Taxpayers can invest in life insurance products and the growth within the policy is not taxed until distribution and even then it is only taxed above the premium amount page. Likewise, if the distribution is a death benefit, there is no taxation — but the investment must adhere to the specific requirements and guidelines provided by the U.S. government.

What is a Private Placement Life Insurance (PPLI) Policy?

From the outset, it is important to note that there are very specific requirements for Taxpayers to qualify to invest in a private placement life insurance policy. These are policies reserved for the wealthy and ultra-wealthy and designed to shelter income — but there are very strict requirements as to who qualifies for a PPLI. Investing in a PPLI requires very high premium payments in which the premium payments which are then invested on a tax-free basis.

As further provided by the Senate Finance Committee:

• • • “PPLI policies differ from traditional insurance products in two key ways. The first is that unlike traditional insurance products, PPLI policies typically require minimum premium commitments of $1 to $2 million or greater (not including fees and other administrative costs).

    • Additionally, PPLI products can only be issued to individuals who satisfy the definitions of an Accredited Investor and a Qualified Purchaser under federal securities laws.

    • An accredited investor is usually someone with a net worth of over $1 million or an individual income of $200,000 in each of the two most recent years ($300,000 per household), whereas a Qualified Purchaser individually or through a company/trust must own at least $5 million in investments

    • By statute, PPLI policies are only available to high-income or high-net worth persons. The second way PPLI differs from traditional insurance products is that, unlike traditional insurance products used by middle-class Americans, PPLI products are highly customizable and offer a far wider range of investment options.

    • While traditional insurance products only allow for policyholders to invest in basic equity and debt funds, PPLI offers a vast range of investment choices that include hedge funds, private equity funds, real estate, private credit, and other options. PPLI policies can even be used to purchase entire businesses.

    • The Committee identified that PPLI providers will often work with investment professionals to set up insurance dedicated funds that either mimic or replicate the underlying investment strategy of certain hedge funds or private equity funds. This tactic is often referred to as setting up a “clone fund.” By doing so, a policyholder can receive investment gains from lucrative alternative investments while shielding those gains from the tax liability they would incur by investing outside of PPLI as the ownership vehicle.”

International Reporting of PPLIs

Another important characteristic of the PPLIs is that oftentimes the company offering the investment is based overseas. And, while an offshore private placement life insurance policy may be able to circumvent having to pay tax on unrealized growth within the policy, Taxpayers still may have several international information reporting requirements for their policies.

Some of the more common requirements include:

• • • FBAR

    • Form 8938

    • Form 8621

The failure to file these forms may result in significant fines and penalties, especially if the IRS believes that the taxpayer is willful on those may be subject to a 50% penalty on the highest years unreported maximum value of the policy. In addition, taxpayers should be aware that the IRS has increased enforcement of offshore compliance from matters involving high-value investments such as Malta Pension Plans — so taxpayers with these types of offshore private placement life insurance policies should be careful if they are already out of compliance.

What if the PPLI Turns out to be Non-Qualified?

If it turns out that the private placement life insurance policy is located overseas and is not qualified or meets the requirements for the PPLI under U.S. tax law, then there is the concern that the income generated would be taxed and the premiums would be taxed as well. Based on the value and the magnitude of the size of many PPLIs this could result in a significant tax burden on the owners of the policy.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.