Senator Wyden wants to tax the investments inside private placement life insurance as though the policy were not there. For the families that use it, that…
Senator Wyden wants to tax the investments inside private placement life insurance as though the policy were not there. For the families that use it, that takes away the whole product.
The appeal of PPLI is arithmetic. Put $1 million in an account that doubles every ten years and sell every ten years, and after thirty years and three rounds of capital gains tax at an assumed 30% you have about $4.91 million. Put the same $1 million in a qualifying policy, let the same investments compound untouched, and at death the policy pays $8 million in cash with $8 million of basis. Held in a trust outside the estate, the same money escapes the 40% estate tax too. The Wall Street Journal has covered why wealthy families find that attractive. It is attractive because it is the one asset with no tax tradeoff - if you can leave the money alone.
S.4279, the Protecting Proper Life Insurance from Abuse Act, introduced April 13, would end that for the policies it reaches. Proposed §7702C denies insurance treatment to an "applicable private placement contract." For a domestic arrangement, the separate account would have to support at least 25 contracts, each proportionately supported by its assets, and contracts held by the same or related persons are aggregated - 25 policies for one family do not count. The holder of an affected policy would be treated as owning its share of the underlying assets and receiving the income, loss and credit each year, cash or no cash. The bill applies on enactment to existing and new contracts, with a 180-day window for certain existing contracts to be converted, exchanged or liquidated.
As of September 26 the official record showed introduction and referral to Senate Finance. The transition clock is not running, and may never run.
What has not changed is current law, which already demands more than most families expect. The policy has to qualify as insurance. The account has to be diversified. The policyholder cannot direct the portfolio - sufficient control taxes the owner on the assets as if the policy did not exist, which is what Wyden proposes to do by statute. And the economic questions stay the same whatever Congress does. How long can the family leave the money invested? What are the fees and mortality costs? How much access to cash does it need? Who picks the investments?
For a family with a policy, the work is to take the actual contract and account arrangements and calculate what this bill would change. For a family considering one, compare the current-law result against the proposed one before signing. Either way the family can put a price on the issue while it is still a proposal - and decide whether the asset without a tradeoff is worth owning if the tradeoff arrives.
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