This content is from: Innovation

'Til Death Do They Avoid Taxes

Affluent investors could live free of taxes on their hedge fund investments until they die, thanks to “private placement” insurance.

Affluent investors could live free of taxes on their hedge fund investments until they die, thanks to “private placement” insurance. The Wall Street Journal reports that the insurance, a variation on a variable insurance policy, escapes taxation since payment comes only upon death. However, even in life, depending on the setup, policyholders can enjoy the fruits of their investment labor by borrowing or withdrawing from those same policies, also free, even from estate taxes after death. According to The WSJ, investors have used similar types of variable life insurance policies to invest in mutual funds, but the private-placement variety allows a broader range of investment options. The policies are especially attractive for HF investment, says the paper, since short-term gains can be slapped with a 35% federal tax, as opposed to a 15% levy on longer-term investments. These insurance policies also are shielded from creditors, too, but they still may not appeal to everyone because of one significant drawback: To satisfy Internal Revenue Service rules, investors are limited in control and choice of where they can place their money. “The IRS has very strict rules about investor control and diversifications,” Gideon Rothschild, a New York City attorney, told The WSJ. “Many high-net-worth people are control freaks and they don’t really want to give up control. For many people it just isn’t the right thing.”

Related Content