Tax efficient investment of trust assets

Investing trust assets via a Private Placement Variable Annuity (PPVA) or Private Placement Life Insurance (PPLI) can offer several benefits, including tax efficiency, asset protection, confidentiality, customization of investment options, and the potential for steady income.

Given the recent changes in income and estate tax laws, it is advisable to recommend that clients schedule meetings with their attorneys and tax advisors, to review their estate plans. In this review, clients can ensure that their wills, powers of attorney, guardianships, and trusts are brought up to the latest standards.

For the tax year 2023, trust income exceeding $14,451 will be subject to the highest federal income tax rate of 37%. In comparison, the income threshold for the 37% income tax rate in 2021 was $13,050. When factoring in the 3.8% Medicare surtax, the combined federal tax rate on specific trust investment income for both years could potentially reach 40.8%. If this income is also subject to state income taxes, the trust's overall tax rate might surpass 50%.

If a trust owns an annuity while acting as an agent for an individual, the annuity retains its valuable tax-deferred status. To determine whether an annuity can help reduce the tax burden, investors should consult their attorneys and tax advisors to receive guidance on appropriate gifting strategies.

Private Placement Variable Annuities (PPVAs) practical applications:

Retirement Planning: PPVAs can be used as a tax-efficient retirement planning tool. Investors can benefit from tax-deferred growth within the annuity, potentially resulting in more substantial retirement savings.

Wealth Transfer: PPVAs can serve as an efficient means of transferring wealth to the next generation. The tax-deferred growth allows for the accumulation of assets, which can be passed on to heirs with reduced estate tax implications.

Charitable Giving: Individuals who wish to make significant charitable contributions can use PPVAs to accumulate assets while taking advantage of tax benefits. Charitable organizations may also benefit from tax-free distributions.

Asset Protection: PPVAs offer a level of asset protection. In some jurisdictions, assets within an annuity may be shielded from creditors and legal judgments, adding a layer of security for investors.

Confidentiality: PPVAs provide a degree of financial privacy and confidentiality. The details and financial information associated with the annuity typically remain private, which can be advantageous for those who value discretion.

Private Placement Life Insurance (PPLI) practical applications:

Estate Planning: PPLI is commonly used in estate planning strategies to facilitate the tax-efficient transfer of wealth to beneficiaries. The death benefit is often paid out income-tax-free, providing a substantial inheritance.

Wealth Accumulation: PPLI allows for tax-deferred growth of investments within the policy. This can be particularly beneficial for high-net-worth individuals looking to accumulate wealth over time.

Generational Wealth Transfer: PPLI can be utilized to create a legacy of wealth that spans multiple generations. Policies can be structured to provide for descendants and ensure a lasting financial legacy.

Estate Equalization: PPLI allows individuals with substantial assets to equalize the distribution of their estate among heirs. This is particularly important when there are illiquid assets in the estate that are challenging to divide equally among beneficiaries. PPLI policies are highly customizable. Policyholders can structure the policy to meet their specific estate equalization goals. They can determine the amount of coverage, select beneficiaries, and design the policy to align with their unique estate plan.

Minimizing Tax Impact: PPLI policies often offer tax advantages. The death benefit paid to beneficiaries is typically income-tax-free, making it an efficient way to pass wealth to heirs while potentially minimizing their tax liability.

Asset Protection: Like PPVA, PPLI can offer asset protection benefits, shielding policyholder assets from certain legal claims and creditors in some cases.

Charitable Planning: PPLI can be used for charitable planning by designating charitable organizations as beneficiaries. This allows policyholders to leave a significant charitable legacy while optimizing tax benefits.

Confidentiality: PPLI policies typically provide a high level of confidentiality, ensuring that the policyholder's financial affairs remain private.

Variety of Investment Options:

Both PPVAs and PPLI offer a wide range of investment options, including traditional assets like stocks and bonds, as well as alternative investments such as private equity, hedge funds, private credit, real estate, etc. This variety allows investors to diversify their portfolios and pursue various investment strategies tailored to their financial goals and risk tolerance.

Private Placement Variable Annuity Investment Accounts:

A PPVA Investment Account offers the advantage of deferring income tax on investment gains. Investors have the flexibility to make deposits and withdrawals from this account, similar to any regular investment account. However, there is a 10 percent excise tax imposed on gains distributed from the account if done before the annuitant reaches the age of 59½. After reaching this age milestone, any gains from the PPVA Investment Account are subject to taxation as ordinary income upon distribution.

The owner of a PPVA Investment Account maintains complete control over the assets within it. This control extends to the ability to make deposits, adjust the asset allocation among various investment options, and modify beneficiary designations at their discretion. Unlike traditional retail annuities, PPVA Investment Accounts lack features such as income guarantees or principal protection. Consequently, these accounts typically have substantially lower fees compared to traditional retail annuities.

Furthermore, PPVA Investment Accounts provide the flexibility to invest in non-registered investment offerings, including hedge funds. These accounts are frequently utilized by ultra-affluent individuals and families who plan to leave assets to a public charity or private foundation upon their passing. If a charitable entity is designated as the beneficiary of a PPVA Investment Account, all deferred gains are transferred to the charity without incurring taxation.

Importantly, PPVA Investment Accounts differ from other charitable strategies that are typically irrevocable.

With PPVA Investment Accounts, there is flexibility for the account holder or their family to access the assets during their lifetime if the need arises. Additionally, the account owner retains the ability to change the beneficiary from one charitable entity to another, offering versatility in philanthropic planning while maintaining control over the assets.

Private Placement Life Insurance Investment Accounts:

Policy owners have two tax-free options for accessing the account value :they can either withdraw the policy's cost basis, equivalent to the cumulative premium amount deposited in the PPLI Investment Account, or opt for a low-cost policy loan against accumulated cash inside a life insurance policy. In the unfortunate event of the insured's passing, all the accumulated investment gains are distributed to the policy's beneficiaries as an income tax-free insurance benefit.exempt from income tax.

Policyowners have two tax-free options for accessing the account value :they can either withdraw the policy's cost basis, equivalent to the cumulative premium amount deposited in the PPLI Investment Account, or opt for a low-cost policy loan against accumulated cash inside a life insurance policy. In the unfortunate event of the insured's passing, all the accumulated investment gains are distributed to the policy's beneficiaries as an income tax-free insurance benefit.

PPVUL Investment Accounts are frequently held within substantial trusts, especially when a portion of the trust's assets would otherwise be invested in tax-inefficient strategies, such as hedge funds and other alternative asset classes. Trustees often utilize a PPVUL Investment Account to manage these tax-inefficient investments. In scenarios where a trustee needs to provide a distribution to a trust beneficiary while the insured individual is alive, they can easily withdraw from or borrow against the investment account's value.

In summary, PPVAs and PPLI have practical applications in retirement planning, wealth transfer, charitable giving, asset protection, estate planning, and wealth accumulation. Their unique features, including tax advantages, confidentiality, and investment flexibility, make them valuable tools for individuals and families with complex financial objectives. However, it's essential to work with financial and legal professionals experienced in these instruments to design strategies that align with your specific needs and goals.

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The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.