Senate Finance Committee releases report on PPLI tax shelters

Often feeling like a lone voice in the wilderness, I have been writing for several years about the abuses involved in so-called Private Placement Life Insurance (PPLI) insurance. These are typically very expensive life insurance policies that are not available to the uninformed public and were originally designed to eliminate commissions, allowing more funds to be utilized within the policy, and to reduce taxes. It was designed with the dual purpose of acting as a tax-free sponge for absorption. The negative tax consequences of arbitrage hedge funds that frequently wasted more taxes than their profits. After the IRS cracked down on PPLI abuses involving hedge funds, PPLI policies are a slightly different type of policy that allows business owners to access cash through policy loans while absorbing taxes collected by private businesses. transformed into a tax shelter.

As part of my writing, a few years ago I wrote an article about how the Senate Treasury finally took up the topic of PPLI. Senator Wyden Announces Fraud Investigation of Fraudulent Private Placement Life Insurance (PPLI) Transactions in the Senate Treasury Department (August 23, 2022). The Senate Treasury is currently releasing a report, “Private Life Insurance: A Tax Shelter for the Ultra-Wealthy Disguised as Insurance” (Senate Treasury, February 21, 2024), so today we look into that. The results will be verified. Read for yourself here.

The Commission’s investigation included obtaining information from major insurance companies that offer PPLI policies. The commission found that while PPLI policies currently protect at least $40 billion from taxes, this is not a protection available to everyone. PPLI policies are available to only the wealthiest 0.1% of Americans. From 2019 to 2021, the average income of PPLI purchasers was approximately $7.5 million, and the average net worth was between $100 million and $150 million. In other words, PPLI does not benefit the average man in the street. Additionally, PPLI products are typically purchased through an estate planning trust, which not only completely avoids income taxes, but also avoids estate taxes when the PPLI policy is paid to your beneficiaries upon death. Therefore, a PPLI policy creates a completely tax-free shelter.

But that’s not all. The Commission also notes that because PPLI policies do not generate mandatory Foreign Account Tax Compliance Act (FATCA) reports or other tax forms (unless, of course, the owner does something very strange), PPLI policies are We also discovered that it is frequently used to hide the owner avoids doing so). Offshore PPLI requires U.S. persons who are owners of such insurance policies to file a Foreign Bank and Financial Account Report (FBAR), but how can the IRS verify that this has been done? There actually isn’t. Offshore PPLI policies may therefore be an ideal vehicle to facilitate so-called “dark money” and other previously recognized fraudulent tax evasions.

The committee’s report goes on to say that the committee will consider what legislation could be adopted to prevent PPLI from being used as a tax dodge; There’s not a lot of specifics about what it will look like. The report does not say that such litigation should also address similar tax abuses by PPLI’s twin brother, privately placed pension (PPAPPA) contracts. Some PPLI and PPA insurance should not be treated as life insurance or annuity for tax purposes, reporting requirements for all PPLI and PPA insurance should be strengthened, and finally, abuse of these insurance policies should be addressed. It has been proposed that severe penalties should be imposed. Notably, the Committee proposes that the new law should apply to both new and existing PPLI and PPA policies so that there is no “inheritance” of benefits.

analysis

Welcome to Congress. Congress doesn’t bother closing the backyard door until several generations of horses have already escaped. Such was the case with PPLI, whose fraud was known as early as 1998, but Congress turned a blind eye, forcing the IRS to play whack-a-mole with the tax shelter ever since. Those who use PPLI to avoid taxes are, of course, large donors to both parties. Taxes are for you, not who is writing me the check.

Since the committee does not offer specific recommendations, I would like to share some of my own. The first concerns the laudable purpose of life insurance, which is to provide for a family when the breadwinner dies. As the report shows, the people who abuse PPLI products are already the ultra-wealthy, the top 0.1%, who don’t really have a legitimate need for such large sums of life insurance. If one of these people died, their heirs would not clip the coupon and buy discounted pizza. For these people, PPLI is just a tax avoidance and wealth transfer tool, nothing more, nothing less. So what I’d like to suggest is that any person may have a face value of life insurance, say $20 million, which is significant for the other 99.9% of Americans, and that’s adjusted for inflation. Therefore, if the amount exceeds the life insurance amount, no insurance contract will be recognized as a life insurance contract for tax purposes. This also applies to PPA products to the extent that the death benefit exceeds this figure.

The next problem is the ubiquitous tactic of stuffing operating companies with PPLI policies so that their dividends and distributions are absorbed by the tax-exempt nature of the policies. To combat this, I invest all variable life insurance (VUL) and variable annuity (VA) insurance policies with at least 100 unaffiliated investors, including mutual funds and hedge funds. We recommend that it be limited to businesses.

These are just the two obvious solutions I came up with while shooting from the hip, but if you give me a little more time I’ll probably come up with several more, including by tinkering with the Modified Contribution Contract rules (MEC rules). You may be able to come up with a good solution. ) This is done by requiring the death benefit of a life insurance policy to be X greater than the policy’s cash value, and also by limiting the amount of cash that can be borrowed tax-free from a life insurance policy.

Cheaters intend to deceive. To be sure, PPLIs and PPAs are not the last tax shelters we will see, but compared to two recent IRS program audits of microcaptives and syndicated conservation easements, PPLIs and PPAs are It is even more abusive, even though it is limited to certain buyers. I hope Congress does something next time to crack down on these shelters, but I’m not holding my breath.

Something about accepting mega-donors.

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