075 | The Untold Power of Private Placement Life Insurance: Amazing Tool to Build Wealth Tax Free and Protect Your Legacy with Michael Malloy

Patrick: [00:00:00] What if you could legally eliminate taxes on millions of dollars of investment gains forever? Welcome back to another episode of the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and if you’re an entrepreneur who’s tired of writing massive checks to the IRS, this episode might just change the way you think about building and protecting your wealth.
Today I’m sitting down with Michael Malloy, one of the leading experts on private placement life insurance or PPLI for more than 30 years. Michael has helped ultra wealthy families across the globe protect their assets, eliminate taxes, and pass on generational wealth using a strategy most financial advisors aren’t even aware of.
In this conversation, we unpack what PPLI actually is and how it’s different from the typical life insurance policies you’ve probably heard about. We talk about who the strategy is really designed for and how crypto investors, real estate owners and business founders are using it to create tax-free [00:01:00] dynasties.
And we break down why this structure gives you the flexibility to invest in almost anything while keeping it off the radar of the IRS. Michael also shares what kind of team you need to build this structure, how it fits into your overall wealth plan, and a real life case study that shows what happens when the strategy’s done right and what happens when it’s not.
So if you’re building a business, growing your wealth, and looking for smart ways to protect what you’ve built from taxes, lawsuits, or even divorce, make sure to listen all the way through. And if this conversation spark some ideas or questions about your own tax strategy, head over to vital strategies.com/tax.
You’ll find our latest resources, planning tools, and advanced strategies to help you keep more of what you earn. All right, let’s dive in. Welcome everybody. Today I’m pleased to introduce you to Michael Malloy. Michael has served the financial needs of wealthy families worldwide for over 30 years and specializes in private placement, life insurance, asset structures, uh, and he’s been doing that for 20 years.
He’s literally written the book on private [00:02:00] placement life insurance, so we are excited to have him here today because it fits well with our conversations with our clients on. Uh, really minimizing taxes, mastering wealth, and, uh, optimizing our lives. So Michael, thank you so much for joining us here today.
Michael: Well, thank you very much for having me.
Patrick: Yeah, I am, uh, I’m excited about this conversation because oftentimes we, we find that our clients are, uh, they’ve grown successful businesses. They, they’ve acquired assets, and we look at all of the different ways they get taxed and it’s awfully frustrating. And, um, I.
One of those tools that we look at is a, is an effective tool, is, is life insurance. And oftentimes we’re familiar with life insurance policy that maybe has some cash value and I have to pay the premiums in and it, it could have some different investment components. You know, I think the examples we’re familiar with are, uh, maybe whole life, uh, than.
Universal life. And then there’s some index universal life and variable universal life. There’s different flavors of that, and I’m excited to, to look at how [00:03:00] private placement life insurance can be an alternative to, to some of those and, uh, who it really works well for. So, um, yeah. Can you just give us a little bit of your, uh, your background, uh, how you got started in this industry, and then we’ll really dig into the topic.
Michael: Well, I, I started out as a risk management consultant. That, uh, morphed into running a small, uh, private insurance agency for a, for a Bay area, a San Francisco area firm. And then I have a kind of a funny story that one of the companies said, well, you know, if you’re gonna continue with a, you have to sell life insurance.
And I say, oh, no, I, I don’t wanna sell life insurance. You know, I mm-hmm. I like, uh, the property and casualty, you know, businesses, homes. Mm-hmm. Uh, et cetera. So finally, I, I got a call one day. He says, well, you, you better, we’re gonna cancel you. So I, I just, uh, [00:04:00] I went out and I, my first client was a, uh, chain sawer and they, um, he was a kind of a guy who they helicopter in to a forest.
Mm-hmm. And then not just him, but multiple guys. Then they cut down the trees and helicopter the, the trees out. Wow. And I thought, and he had six children. So then I thought, well, he seems a good candidate, but what company is going to take him? So I filled out the application and I sent it in, and, uh, it, uh, it passed through.
So I called the, uh, the company and I said, some, you know, uh, I was a little surprised that you approved this. And they said, we don’t underwrite for profession. So I thought, uh, well, I scored pretty well on my first, uh, my first case. Yeah. I love it. Yeah. Um, so that, so that kind of morphed into more sophisticated, [00:05:00] uh, you know, life insurance strategies with, uh, estate planning attorneys.
And then kind of in the early two thousands I kind of went more international. Yeah,
Patrick: very good. Um, I, I think when about the, the issues that our clients are facing and they’re, they’re losing too much money to the tax, right? They’re paying, you know, property tax, payroll tax, income tax. Then we get capital gains tax on the money that we’ve already earned to pay tax on.
And then, you know, then there’s estate tax at the end of our lives. So, you know, we’re getting taxed again on. All of those things. And so I think that’s, that’s awfully frustrating. You’re clearly an authority in this, this space. Uh, can you give us a quick overview of how, uh, private placement life insurance works and then we’ll, we’ll start digging into some of the, the details there?
Michael: Yes. It, it, it, at first to blush as you said, it, it, it seems like a strange vehicle. ’cause most people, I like to say they, they kind of lump all the insurance [00:06:00] in their brain and. After a certain age, they begin to hate insurance because, you know, they’ve had a bad auto claim or whatever. But the, so on the retail level, uh, it’s true life insurance doesn’t really solve, um, your client’s financial problems, but, uh, private placement life insurance does.
So can I give you just a very brief history of, uh, yeah, that would be wonderful. Okay. So it actually started in the 1970s and, uh. Executives of Fortune 500 companies, uh, wanted a, a broader investment to platform to invest in. And that by the 1990s, very wealthy families and estate planning attorneys said, well, you know, we can use this for our own planning.
And then in the early two thousands, major companies came into play. So you might ask yourself, well. It’s been around since the 1970s. Why [00:07:00] haven’t I heard about it? Why, you know, if you’re, you’re saying, this thing is so good for me. Mm-hmm. Well, there’s basically two reasons. The IRS has very specific rules about who can invest in a private placement, uh, asset structure.
To summarize the rules, uh, for the most part, you need to have $5 million or more to invest. And then the other reason is. What has to come into play to get a structure, uh, started. It involves tax planning, financial planning, insurance planning, estate planning. So for the most part, you know, people are happy to stay in their lane.
They don’t go too far afield, so that’s why very on in an engagement with a client early on, we start to put together a team of experts who can help them. Bring the structure into fruition. And what we usually end up with [00:08:00] is a mixture of their trusted long-term advisors and various specialists, uh, that we bring into, uh, into the picture.
Patrick: I love it. So this is oftentimes, uh, a similar role to what we play. We, we feel like we were involved in the client’s, uh, four cornerstones of, I’ll call it the, the what we. Dub the entrepreneur private office, and it starts with cash flow. Let’s understand the client’s cash flow really well. Then let’s ta understand and attack the tax liability.
Let’s, let’s drive that number as low as we can possibly get it. Then once we’re not sending money to the, the taxing authorities, let’s invest the dollars that we, we do have. And then finally, let’s build a protection piece around all of it to make sure that, you know, uh, the wealth we’ve built doesn’t get, um, uh, doesn’t go away.
And as, as clients wealth. Grows, their complexity grows. And so we are very broad in our understanding. Uh, we know a lot about, um, we know a little [00:09:00] bit about a lot of topics and so we have to go bring in the experts and go, oh, this is a perfect. Opportunity to put a, a trust in, in place, you know, uh, or, you know, here’s a legal structure that we could utilize, or we need this third party administrator to execute on this tax strategy.
And so, uh, I, I, I think it’s great that, um, you’re helping build the team. Can you talk us through what that team looks like? Who’s involved in that team to, uh, really start to build out this private placement life insurance
Michael: structure? We do the insurance planning, of course. Mm-hmm. And, uh. The, it kind of depends on the structure.
Uh, a typical for a US client, a typical structure is a, uh, a life insurance trust. So, um, almost any estate planning attorneys can draft a life insurance trust. Yeah. But we have to bring in one who knows how to make it, [00:10:00] optimize it for private placement life insurance. Um. So knowing who to go to. And then there’s some that, uh, have various subspecialties.
We do a lot of, uh, crypto clients. Mm-hmm. So if, so we have some estate planning attorneys who really know crypto and then, um, say for a real estate client, um, then we bring in a estate planning attorney who knows, uh, who knows real estate. Um, sure. We try to disrupt as few relationships as possible. And the attorneys that we do engage, they’re very good at working with the clients, uh, you know, of long time advisors.
Mm-hmm. We’re not trying to kick people outta the picture.
Patrick: Sure. I fully understand that. We, we think the same way. It’s like we’re, we’re not trying to replace anybody’s CPA Oftentimes attorneys are different than the CPA ’cause. The CPA, you need them every year. Oftentimes [00:11:00] attorneys. I have a specialty and I, I call them up when I need them for my, uh, specific problem.
And then when I don’t need them, I can go, you know, sort of put them back on the shelf and then grab another one when I, uh, when I have a different problem. And so, uh, that’s, that’s, that’s really good. So I, I wanna go back to something you said. Typically it’s $5 million to invest. Now going back to the fact that you’ve got clients putting crypto and real estate in, that doesn’t need to be 5 million liquid cash, right?
It could be 5 million of. Assets that I’m already already holding. Is that, is that correct?
Michael: That’s correct. Getting them into the policy, uh, involves, uh, some more legal issues. Say, you know, just go to real estate. If somebody has extremely low basis real estate, what we usually would do is like, um, a sale for a note.
Not the IRS, uh, bloom payment one, you know, which they’ve come down upon in the last couple years, but one [00:12:00] where they pay a reasonable amount of tax over the, you know, uh, a reasonable amount of time, uh, just to soften that blow. Otherwise, it’s either, depending on the structure, the IRS considers it a, uh, a sale or, or a gift.
And, uh, we do our best, uh, to avoid that. Then once it’s in the policy, uh, it avoids all, uh, all tax. It’s, it’s like all life insurance policies, uh, what’s in there gets tax deferred growth. And that’s, you know, since the beginning of cash value life insurance.
Patrick: Yeah. No, this is great. Now, I, I know there’s been some rules that, uh, it used to be I could have a.
Very small face amount, and I could, I could max fund life insurance policy. And then the, the government came out and said, well, this, this is, uh, we, we gave this tax free nature because we, we liked the, I’ll say the [00:13:00] community social impact of the death benefit. Uh, now it seems like it’s more of a tax move.
And so they, they put the modified endowment contract rules in place to help us, um, sort of keep life insurance at the forefront, do the modified endowment. Contract rules apply in this scenario, or does that not really come into play?
Michael: Uh, yeah, very much. Uh, they very much come into play. There’s kind of two very basic, uh, policy designs.
So for a younger person, they use these structures much like a retirement account. It’s kind of a, you might call it an unlimited Roth ira. Without the, the Roth rules. Um, and for older clients, the whole strategy is, is leaning toward being part of their estate plan. Uh, so each structure has [00:14:00] certain rules, but we mostly avoid the modified endowment rules.
Um, with either of those two structures, I.
Patrick: Sure. Okay. This is great. So when I’m thinking about a traditional life insurance policy, um, that insurance company is, uh, ensuring, you know, they’re utilizing the law of large numbers, right? They’ve got lots of people that they’re insuring and they, they know, uh, some people are gonna live to life expectancy, some are gonna be longer, some are gonna be shorter, but they, they know that how, you know, the death benefit’s going to pay up.
Can you talk to us how, how death benefit works for a private placement life insurance policy?
Michael: Well, for the most part, as we talked about, we’re using the tax benefits of life insurance mm-hmm. Uh, to increase, uh, the amount of their investments over the course of their life. Sure. So [00:15:00] we try to keep the death benefit as small as possible.
Right. So on some designs it can be as little as say 5%. What’s, uh, the, the total asset value in the policy, uh, but in general that fits the client’s needs. It, it’s not, uh, it’s kind of the, the opposite, uh, strategy of when a, like an estate planning attorney tells a client, well, you need your, your, um, estate planning bill’s gonna be $10 million.
So you go out and buy the cheapest, um, term insurance. That you can, that’s gonna run the course of your life to satisfy mm-hmm. To satisfy that. Yeah. Uh, so in general, uh, uh,
ours combines, you know, their, uh, investment growth with mm-hmm. The, uh, [00:16:00] low debts benefit. So if you compare those two strategies, generally they’re going to pay much more for that 10 million in term than they are for this. Say 5%, uh, over their, uh, asset value.
Patrick: Got it. Okay, great. We love the concept of the, the tax-free wrapper of life insurance.
And so I, I was just trying to understand, you know, how we go about calculating and paying out a death benefit, uh, uh, to still meet those, um, we’ll call ’em requirements to, to have some death benefit in the mix. So. That’s great. So can we talk a little bit about the mechanics of how, uh, let’s, let’s use the crypto example.
Uh, we were talking about, uh, somebody’s got a huge crypto portfolio. They’ve got, uh, other assets and they’re like, they, they call you up and say, Michael, I, I wanna move $5 million of my, uh, crypto portfolio into private placement life insurance. What is their flexibility for changing [00:17:00] that investment once it’s in the life insurance?
Can they call us up and go, Hey Michael, it’s, it’s time to make a change. I think crypto’s been great. It’s run its course, but now the new opportunity is, uh, this business venture that’s, you know, wandering into ai and I want, I wanna move my, my assets over there. Is there opportunity to make changes on the investment side?
It, in fact, it’s
Michael: ideal because, uh. The PPLI asset structure is classified as, um, a variable life insurance policy. So the tax code, uh, says within the policy, uh, you can make tax free exchanges. So, uh, within the policy you can diversify into almost any asset class. I love it. Okay.
Patrick: Just thinking about, uh, going back to our crypto example.
Let’s say I made an initial investment of, uh, half a million dollars and now [00:18:00] my portfolio has grown to $5 million. Can’t the tax consequence of moving, uh, those, those assets into private placement life insurance? I think my main question there is do I have to pay tax, um, when I move it into the policy?
Michael: Uh, again, it depends on your, your, your basis. So, uh, but in general, uh, if you’re thinking about, you know, long-term or semi long-term, 5, 10, 15 years, we can do the sale for the note, even if it’s a very low basis and you might have to pay, uh, you know, some tax, but. It’s almost always better to pay that tax now and then reap all the future gain inside the policy than to, uh, worry about paying that, that tax now.
’cause once it’s in there, if it’s structured, uh, properly, [00:19:00] there’s no tax. And then when you pass away, uh, it all passes to your heirs as a tax-free, uh, death benefit. So the only. You know, time we’ve really had clients bought is, is like this example of the real low basis real estate. They mm-hmm. You know, and inherited some, uh, uh, commercial property from their grandfather.
And, you know, the basis was so big it, it’s not worth putting it into the, the policy and the, the tax bill would be too high. Yeah. Got it.
Patrick: Okay, great. Yeah, no, this is, this is fantastic. ’cause I, I think about, uh, where we’re at, uh, in the US right now, we’ve, um, printed trillions of dollars. Uh, the debt is growing dramatically.
I’m thinking about how we’re going to pay for that. Uh, there’s some, uh, talk on utilizing tariffs and some of those other things. But I think at the end of the day, you know, uh, if we think about our household. I can’t be [00:20:00] running it at a deficit for too long. Right. And the US has been run running at a deficit for a long, long period of time, and it’s just not sustainable long term.
And so, uh, I’m concerned that at some point, you know, we might be at a historic low for income tax rates and like you’re talking about, it would be ideal to pay a little bit of tax now to move as many assets as I can into, uh, a vehicle that allows me to, um. Grow those assets tax free forever. Right. Um, especially utilizing, uh, something like a irrevocable life insurance trust that, uh, you know, uh, those, uh, assets pass on tax free and, uh, aren’t a part of my, my taxable estate, I think is, uh.
Uh, fantastic because I’ve, the estate tax keeps growing. Uh, I think that’ll probably extend with, uh, the Trump administration. But, um, you know, at some point, if we look at the history of the estate tax, we’ve seen it all over the place. And, uh. A lot of our clients are, are looking at, you know, a [00:21:00] hundred, $200 million net worth and they’re still in their forties, right?
And so, um, you know, their, their trajectory is, you know, they’ll, they’ll probably be at a billion dollars by the time they pass away and it’s, um, uh, they’re gonna, well outpace the, the estate tax exemption. So I think this is great. So can we talk about, uh, a lot of our clients are, are business owners. Um, is there opportunity to.
Hold some of the shares of the operating company in private placement life insurance. ’cause I look at how quickly some of these businesses are growing and I’m like, wow, that, that could be, uh, a tremendous, uh, tool if that’s, uh, something we could do.
Michael: Uh, you can, but you, you have to be very careful. So this is where, uh, the attorneys that we bring in, uh, really earn their money.
Uh, yeah. Because there’s something called, um, the investor control doctrine. So what it basically says, and [00:22:00] to, you know, summarize a, a stack full of legal documents, um, inside the policy, like you said earlier, when the IRS gives a, a tax benefit, they mm-hmm. They also take something. Yes. So in this case, they’re taking some control from you.
They said, well, you can put all these assets in the policy and they can grow tax deferred. You know, that’s fine, that’s perfectly legal, but you, you can’t, uh, micromanage them. You can’t tell your investment advisor that you have to put in place when the assets go into the policy. Uh, you know, I wanna buy Apple stock when it’s at such and such, or, uh, I want this specific, uh, um.
Bond, you can give an investment mandate and that mandate can be very broad. I mean, [00:23:00] it’s, it’s very similar. If you, if you went go to JP Morgan Chase or Mellon and give them your portfolio, uh, the investment advisors is going to work with you at your risk toler tolerance level, but they’re going to, you know.
Do the daily nitty gritty of choosing, uh, what stocks and what bonds. Uh, otherwise, you know, you wouldn’t go to them, you’d just do it yourself. Um, right. So you have to give up some control, but you can, the person, you can appoint as your investment manager, it can be somebody of like mind. I mean, there’s no rules about, um, choosing any kind of buddy with, uh, reasonable qualifications.
So for most people, they’re willing to give up, um, a certain amount of control for that, uh, you know, uh, tax deferred growth.
Patrick: Yeah. Yeah. I love it. [00:24:00] So, I, I’m thinking through the, the real estate example. Uh, let’s say I put my, um, I, I buy a piece of real estate. Um. I buy a piece of real estate. I don’t have a five years down the road, we’ve, we’ve managed that property, we forced a fair amount
of appreciation and now that we wanna sell that project, do I have control over when I sell it?
Michael: Uh, kind of yes and no. You know, the very phrase says it’s vagueness, the investor control doctrine. So yeah. What it comes down to is, uh, you know, a half dozen private letter rulings and, uh, uh, and a, a few, uh, cases in case law, but there’s no written, uh, you know, it’s not, uh, etched in stone about mm-hmm.
What you can [00:25:00] do and can’t do. Like I said, you’re not supposed to, you know, have complete control, but you can have some control. So, um, the, you know, it’s kind of a facts and circumstances, uh, case, but if you, you know, if your investment mandate to the, um, you know, uh, investment advisor is that, you know, when the property value reaches a certain place, you know mm-hmm.
Certain gain, uh, that’s you want to sell, then you know, that’s perfectly. Uh, fine, but you’re not, you’re not supposed to call him up in a panic and, and say, you know, uh, the tea leaves that, uh, I’m supposed to sell today, so please sell it. You know? Yeah,
Patrick: yeah. No, that’s, that’s great. One of the things, and, and I’m wondering if this, this, uh, would, would check that box, oftentimes with our clients, we’re creating a, an investment policy statement, and, [00:26:00] um, in that investment policy statement, it’s saying.
With a sober mind, here’s the, here’s the decisions we would like to make with our investments, and would it be the case that you would have something like that in place? And so, um, it’s going to take some of those, uh, when the markets are doing, you know, I. What markets do and clients start to get concerned.
They’re not calling you up going, Hey, uh, now’s the time to, to sell or to buy. And we’re like, well, hey, hold on a second. Let’s, let’s just look at what we agreed to, uh, how we were gonna manage this with solid investment principles and, uh, let that dictate our decision making. Yeah. Does that, yes. I mean, that’s an excellent
Michael: example of something that, uh, uh, I think most practitioners would say.
It does not run afoul of the investor control doctrine.
Patrick: Okay. Yeah, that’s great. So Michael, when, when somebody puts their, their assets into the private placement life insurance, are they having their investment [00:27:00] manager make some of those decisions or is that somebody from, uh, is that you or your team that’s, that’s helping pull the levers on, on how those dollars are invested?
Michael: Yeah. Our team and the, the insurance company are, are. Uh, investment agnostic. Like it’s totally up to the, the client and, uh, their investment manager. Got it. That’s great.
Patrick: Um, so when you, you bring in the, the life insurance company, um, component, can you explain how the life insurance company fits into private placement life insurance?
Michael: Well, the, uh, for us, we deal exclusively with, uh, uh, offshore companies. Because the, the client gets, uh, much superior, uh, asset protection. They get a, a broader range of investment of structures. There’s, uh, the costs are lower. Uh, [00:28:00] so the, the insurance companies we work with, uh, for the most part, the clients never heard of them, but they, they act more like, uh, uh.
Administrators of all the assets in the policy than they do like a traditional life insurance company. But the death benefit then is handled by the largest, uh, reinsurers in the world like Munichre Swiss three arch, who in some cases have, you know, trillions of dollars under management. So, yeah. Uh. They, you, you, your death benefit is, is, you know, completely secured by these gigantic reinsurance companies.
And the, uh, for the most part, the client will find out over time it’s much better to deal with a kind of a small, you know, office of of mm-hmm. People who really know the PPLI than some large bureaucracy that, uh, that you would find at a traditional life [00:29:00] insurance company.
Patrick: Yes. Uh, speaking from experience, we’ve got clients that have, um, significant dollars tied up in, um, and, and I say that in a good way in a life insurance policy, but sometimes when we, you know, our, our contacts at the life insurance policy, uh, we’re not getting the kind of service and follow through that we would like because, like you mentioned, it’s a huge bureaucracy we’re calling in.
We might get somebody in a call center that, uh, uh, may or not be familiar with the workings and how all those things shake out. So I, I think that’s. Um, I think that’s fantastic.
Hey, real quick, if you’re listening to this and thinking this is the kind of strategy I need in my life, I want to invite you to check out vital strategies.com/tax. That’s where we can collaborate on advanced planning, ideas, tools, and resources to help entrepreneurs like you keep more of what you earn.
Whether you’re already working with a great team or just starting to explore tax saving strategies, you’ll find insights there that can move the needle in a big way. Again, that’s vital [00:30:00] strategies.com/tax. Go check it out when you’ve got a minute. Now let’s get back to the episode.
Uh, one thing that we, we often look at too, is when we think about, uh, our levels of tax planning, okay? Level one is the IRS gives us guidance, but it doesn’t take any investment. So this is good administration and bookkeeping. Uh, level two is the IRS. Gives us guidance, but we have to invest some dollars.
Now this is gonna be like IRAs, 4 0 1 Ks. Those are typically very, very low cost to administer. Level three is we’re combining sections of the code to create efficiency and we have to bring in third party administrators to help us execute on these plans. And there’s usually minimum amounts because the fees start to you, you have to pay professionals to, to execute on these things.
And the, the fees start to, um, you know, erode the. Uh, benefit if we, if we’re not putting enough dollars into, uh, the plan, what would you say is a sort of a [00:31:00] minimum threshold? You know, before we started, you know, about $20 million in net worth would, would make sense for a minimum, uh, client net worth to, to start looking at, uh, private placement life insurance.
But how many, what’s a minimum dollar amount or value that should go into a private placement policy? Uh,
Michael: probably 5 million. Okay.
Patrick: And then typically is there, what does the fee structure look like to put something like this in place? Is it, is it a flat fee? Is it depend on the professionals we’re bringing into the mix?
You know, we’ve talked about, you know, we might have to bring in a real estate attorney or an attorney that understands crypto, uh, better is how much of that is variable and how much is, is fixed.
Michael: Uh, typically on the insurance company side, uh, there’s a 1%. Set up fee, 1% of the assets going in, ’cause all the most, all the work goes on, um, at the beginning.
And then there’s a, uh, a [00:32:00] 1% ongoing m and e for like somebody in the 10, 20 Yeah. 30 million range. And then when you start, um, going up to say a hundred million. That 1% annual fee starts scaling down to maybe 50 basis points. So it’s very small fraction of what mm-hmm. One would pay on a traditional life insurance policy.
And for the most part, particularly say on a whole life policy, you can’t even figure out, uh, what’s your paying and fees, but, right. You can see it in the commission in that. The first few years, you hardly have any cash value. So where is that going? You know, so, right. Uh, the clients, one thing they like about, well, the first time I was seen, uh, I was shown a, a, an illustration, I couldn’t quite believe it.
It was just like eight columns on an uh, uh, Excel spreadsheet. [00:33:00] And every penny is accounted for. Yeah. So clients like the, uh, transparency of, uh, PPLI. Yeah.
Patrick: Beautiful. I think the next question I have is, can we talk about the underwriting? Um, like if, if somebody’s in great health or terrible health, how does that affect, uh, private placement life insurance?
Michael: Uh, it’s much more flexible, uh mm-hmm in that anyone who has an insurable interest in the structure, it can be the insured life, or you can also have, uh, multiple lives. So if someone. Then the other flexibility is, uh, when do you want the death benefit to be paid out? Uh, we have some structures where, uh, it’s virtually never paid out because, uh, we keep switching an, an insured life.
Uh, if somebody’s, [00:34:00] uh, you know, starts in their, their thirties and forties, and maybe by the time they’re. In their fifties, they’ve diagnosed with something that’s going to lessen their life expectancy. We can switch an insured life. Uh, and then sometimes you do want the assets to pass for estate planning reasons.
So it’s, it’s fine, uh, to to to have the death benefit payout. So there’s much more flexibility than, uh, traditional life insurance.
Patrick: Yeah, that’s that’s fantastic. So I’m, I’m gonna summarize some of the things that we, we’ve talked about here today, and then, then I’ve got a few follow up questions that, we’ll, we’ll build on that.
So, uh, typically some minimums are about a $20 million net worth and committing about $5 million to the, the, uh, the private placement life insurance. Uh, the, the fee structure is very low. Uh, there’s lots of flexibility with. Underwriting and even replacing insureds. And we’ve seen that with some traditional policies that are [00:35:00] maybe corporate owned and an executive comes in and then we can, uh, they leave and we can replace, um, you know, that that executive with the new executive.
And so that all makes, um, sense to me and we can fund this with, uh, non-cash assets, which I think is, um, uh, fantastic. And again, I’m, I’m looking at all these things and I’m going, Michael, this, this sounds. Almost too good to be true. I’m taking my assets that are taxed in a, um, you know, capital gains income tax, um, and, and I’m moving them into an, uh, an investment tool that sort of eliminates a lot of that tax.
Can we talk through how closely the IRS looks at this and does this open me up to, uh, some additional scrutiny end. We’ll, we’ll just pause there before any additional questions, but yes. How, how, how does the IRS look at these, uh, these private placement life insurance plans?
Michael: Well, I’ll that kind of answer it in two parts.
The first is they hardly look at them [00:36:00] because the reporting is so minimal for the most part, they can’t even figure out if you have one. Uh, that being said, um, uh, in the last, in the Biden administration. This, the head of the Senate Finance Committee, uh, Mr. Whiten, uh, shined a very bright light on these, um, on these structures.
Uh, but now the new administration, the new head of the finance committee says they’re fine and we’re not gonna be shining a bright light on them. So. I see it as great advertising if the former administration is so concerned about the tax savings on these plans. Mm-hmm. Uh, uh doesn’t that say something about the plans?
If, uh, the current administration ha hadn’t come into office? I probably would [00:37:00] be answering your question. Differently, uh mm-hmm. I’d be saying you should probably be, uh, pretty cautious about them and so on and so forth. But you, you can, it’ll, they’ll probably still exist for a certain number of years because, uh, Congress, uh, has a hard time deciding on even when to meet, let alone Yeah.
A complicated tax decision and, uh, uh, changing the, uh, the regs of not only the tax code, but the insurance code. To make these plans, uh, uh, unpalatable. So, sure.
Patrick: And, and I’m curious, your perspective, and I, and I know you don’t, uh, know the minds of, of Congress, but when we look back in time and they made changes to life insurance, they drew a line and said, anybody with a policy before this line, you get to participate with the old rules.
Anybody that’s putting a policy in place under the new rules like this, this is how you have to structure things.
Michael: Would you see it? The case? [00:38:00] Yeah. That’s a traditional way. Yes.
Patrick: So if they did change the rules, if we got our policy put in place before the rule change, we’re probably in a fairly healthy place.
And then they would just draw a line and say, well, this is what your private placement life insurance needs to look like, or private placement life insurance is no longer, you know, uh, acceptable. Um, so yeah. ’cause I, I think there’s a concern of, you know, what I don’t want to have happen is I put this strategy in place and then all of a sudden, you know.
Congress decides to retroactively rewind, you know, an unwind five years of, of good work. And it’s like, uh, that’s, that’s pretty challenging. We don’t have too many examples of that. You know, they’ve tried to do a few things retroactively with, you know, a few months, but they, they haven’t necessarily gone back years.
So, um, well, it’s pretty
Michael: complicated if you’re going to do it that way to, um, to, to figure out, uh, you know. It gets very messy in terms of the, uh, [00:39:00] enforcement. Traditionally what they usually do is they grandfather all existing plans and say, you know, from January 1st on, uh, you know, you better do it anyway.
Yeah.
Patrick: Very good. Um, Michael, if it’s not too much trouble, can you give us a, I’ll say an example or a case study of how you’ve seen private placement life insurance work out Well for. An entrepreneur in their, their financial situation.
Michael: Yes. I, I have a client in mind, but it, it has a kind of a unhappy ending.
But the unhappy ending, I think, uh, can, uh, serve as some, i, I think it will be, uh, useful for our audience to hear. So the person I’m thinking of is a, is a crypto investor, so, mm-hmm. He had about, uh, $30 million of, uh, crypto assets that he wanted to shield from tax. And, uh, [00:40:00] so let we, let’s give him a name that’s not his own.
We’ll, let’s call him Tom. Mm-hmm. So Tom was an engineer, and, uh, engineers can be challenging clients because they want things spelled out. They want things in writing, they want things very clear. So we were happy to have him because that’s the way we do things. Uh, he was even able to help us out because, uh, it, it’s not complicated to put in place these structures, but there, there is like say, you know, a dozen steps that you have to go through.
Mm-hmm. So we typically give a client, uh, this list of, uh, steps at the beginning. So Tom and his, uh, the attention to detail was able to help us out here and, uh, refining our steps. So his, uh. Structuring is pretty simple. Uh, created a life insurance trust. Um, um, and the, you know, that purchases a policy and the assets [00:41:00] go in.
Uh, the, uh, the basis was reasonable. He, he had to pay a small amount of, um, capital gains tax, so he was very happy with his structure. But unfortunately a few years after he had it in place, his marriage. Of, uh, many years began to fall apart. So one of the, uh, asset protection elements that we fold into the structure is, we call it divorce spoofing.
Normally a a contesting spouse would have no access to, uh, any of the assets inside, but ta in early on thought, well, he can. Make this divorce kind of go away. He thought by, uh, dismantling his structure and uh, dividing it in two and giving it to his ex. So he thought, well, that’s a smart thing to do. [00:42:00] But then it turned out to be kind of the opposite because, uh, she became very aggressive and wanted even more, which brings up another.
Element of the structures. A lot of, uh, tax saving structures are very difficult, uh, and costly to unwind. But a private placement life insurance is, it costs, uh, next to nothing or sometimes nothing to unwind. So clients like that, and like I said, in Tom’s situation, he kind of made the wrong move. Uh, but if he made the right move, uh, you know, he could have protected all those assets in his divorce settlement.
Yeah.
Patrick: Got it. No, that’s, that’s fantastic. ’cause when I, when I think about, um, what private placement life insurance offers, there’s uh, it sounds like anonymity, uh, which is great. Uh, there’s a tax shield. Uh, we also have fairly simple [00:43:00] compliance. It sounds like. I don’t need to, um. Have a, a full team of, you know, legal and uh, CPA staff to like, you know, manage this thing every year.
Obviously there’s, there’s gonna be some pieces, I’m sure of the life insurance Trust that, um, you know, take some, some of that. But, um, yeah, it just seems like it’s checking a lot of the boxes for, for us when we’re, uh, thinking about, you know, one of the things that we outlined at the beginning that the four cornerstones, right, it.
It clearly has a tax piece, it has a wealth building, uh, piece in the investment side, and then it has a, an asset protection piece that’s also, uh, fantastic. So, uh, love all of those, those pieces and then not terribly expensive to administer, which I think is also, um, fantastic. Sometimes we’re weighing the cost to administer compared to the tax.
And, uh, you know, if we’re, we’re looking at 1%, uh, it’s a pretty low, low cost to, um. Put this structure in place and, [00:44:00] uh, keep it going. Except, uh, this, this is fantastic. Um, Michael, is there anything else we should be talking about with private placement life insurance that we, we haven’t touched on yet?
Michael: Well, the, the, you just mentioned one, you know, simplified reporting.
Uh, sometimes clients are tearing their hair out of, uh, particularly with the K ones, you know, at text times. Mm-hmm. Well, you don’t have those. Once the, uh, assets go into the policy, so basically what you’re reporting to the IRS is that you, uh, have an insurance policy and you report one number, the total cash value, so that that’s your reporting obligation.
So that’s why I said earlier that the, the IRS hasn’t really looked at this, uh, because it’s not really apparent from a. A normal return that, that you have an offshore PPLI policy with, [00:45:00] uh, because you’re just reporting you that you have an insurance policy and you’re reporting just one number. Mm-hmm.
Patrick: Sure. Yeah, that’s, that’s great. Uh, I guess thinking through all of the benefits, why wouldn’t somebody do PPL Life private placement, life insurance? What are the downsides to, to considering this strategy?
Michael: Well, if somebody. We hit on it earlier when we were talking about the investor control doctrine, and if somebody is, is such a, uh, hands-on person, they don’t want to give up any control, um, you know, they’re going to run afoul like, uh, this famous case with Mr.
Weber who, uh, I don’t know, there was like thousands and thousands of, uh, email communications with the client and his attorney and other advisors. About, uh, what he wanted to do and not do in the investment. So if you’re, uh, of that elk, it’s probably [00:46:00] not for you. And in general, you know, because in some sense, when people hear the word life insurance, like I said earlier, they lump it together with, you know, all their other, uh, insurances and experiences with insurance.
So they’re a little wary that. Uh, something called life insurance can do all those things. Yeah. So I would say, uh, those are the main reasons and, and like, oh, and then the other one, like I said, with the, uh, even though the client doesn’t have to be an expert in all the disciplines that have to come together to put the structure in place.
Uh, the, they have to have some understanding. So it takes a, a somewhat sophisticated, uh, client. Uh, I mean, sometimes you just scratch [00:47:00] your head, but I mean, the, in the crypto world, there’s a lot of 20 somethings multi, uh, millionaires out there. Uh, so I mean that we had one who, I think he was like 25 and he.
Uh, it, it was like kind of the biggest home run you can do and with a, yeah, a tax, um, structure. It was kind of like a pre IPO situation. Mm-hmm. So, yeah. You know, it was his, we’ll call it stock, you know, the, the equivalent in crypto, uh mm-hmm. Was worth almost nothing. And then he thought it was gonna go to, you know, over a hundred million.
We said, well, you know, and that was going to happen in six months, so. Mm-hmm. So, but to put that in place, he had to pay like, I don’t know, 150,000 in a, in a, for a fee, you know, to the company to set this all [00:48:00] up, the attorneys and all that. And he didn’t wanna pay. Yeah. So he would’ve had like, uh, you know, instant tax free growth, over a hundred million dollars.
And, uh, he, he, we couldn’t convince him that, uh, it, it was better to pay a little money now, you know, but in his world, like, you know, he’s barely learning about tax. He, he hasn’t had him many tax bills, you know, so, uh, you know, that, that was one of, that was a very frustrating, uh, uh, session. Yeah.
Patrick: Yeah. And, and I, it’s interesting because we’ve had clients that are fall into that category too.
Um, and some ex clients that they’ve had a lot of success in a very short period of time and they haven’t gone through the, you know, the ups and downs of entrepreneurship yet, you know, it’s all been up and, um. You know, we, we try to give them wise counsel on, you know, Hey, here’s how to protect some of these things.
Here’s how to, and, and they, [00:49:00] they almost think they’re, you know, bulletproof like that. None of those things are, are going to happen to them. And so, uh, we just figure out real quickly that those, those engagements don’t make a lot of sense for us long term, but, uh, uh, ’cause it, um, you know, uh, and, and it could even be so much as like, you know, they wanna continue to pull the levers, you know, uh, make the moves on the investment side and.
Uh, I, I could see that being a scenario too, where it’s like, that’s not how this is going to work now. You know, uh, this, this life insurance policy with a hundred million dollars in it will take care of you for the rest of your life, but, uh, uh, you can’t call us up with your new hot stock tip. So, uh, yeah, that’s, uh, that’s great.
Um, good. So Michael, is there anything else we should be talking about before we, before we wrap up? Because I’ve, I’ve got a few things, uh, on the wrap up side, but I don’t wanna miss any key points.
Michael: No, uh, we talked about the asset protection, the divorce proofing. Mm-hmm. Um, the simplified reporting, by [00:50:00] far, the biggest reasons people come to us is the tax deferral and mm-hmm.
So, yep.
Patrick: Yeah, no, and, and I think I, I agree with you. Oftentimes people hear life insurance and their brain shut off. They’re like, I don’t want anything to do with life insurance. And what I, what I wanna do is go, no, let’s embrace life insurance just as a tax wrapper. Let’s just think of it as what it can do for us from a tax efficiency perspective.
Uh, let’s look at it on its merits, and then we can decide if we, we like that as a tool or not. So, um, I think that’s, that’s great. So, uh, thinking about. Call to action. Um, you know, I think if, you know, we’ve got clients that I think this, this absolutely makes sense for, uh, we’re gonna have to set up some time to talk more about, uh, this opportunity and how we can get them them plugged in.
Because I, again, uh, when I think about the, the buckets that are available to us from an investment perspective, I’ve got, we’ll call it a qualified retirement bucket, right? Pre-tax bucket. Every dollar I pull out is a hundred percent [00:51:00] taxable. It’s probably my least favorite bucket. Uh, it’s okay. It moves the dollars down the road, but it’s, uh, I don’t like taking money out of it.
Then I’ve got the sum tax bucket, which is like my brokerage account where I’m gonna pay capital gains and um, you know, my real estate falls into the sum tax bucket too. And then I’ve got the no tax bucket, which are tools like life insurance and Roth IRA and that type of thing. And it’s like, I want as many dollars as I can get into the no tax bucket.
That’s, uh. By far my favorite. So, um, I think the work you’re doing here is, is fantastic. Um, uh, if people wanna reach out to you and get connected and talk about, um, you know, private placement life insurance, they can, they can call us and we’d be happy to get ’em plugged into you. But, uh, is there, is there a place people should go to to learn more about private placement life insurance?
Michael: Yeah. Our, uh, our website, e EWP Financial. Uh, has a abundance of material, uh, videos. Yeah. And, uh, different pieces I’ve written over the [00:52:00] years, so there’s lots there.
Patrick: Fantastic. We’ll make sure we have notes to that, uh, or links to that in the show notes so people can go check out. Um. WP financial.com. Um, yeah, I appreciate all of the information and knowledge that you’ve, uh, shared with us and put out there on the web.
I think this is, uh, uh, an unbelievable tool that, um, um, like a lot of the things that we talk about with our clients, they, they don’t get a lot of press because they’re not for everybody, right? Like, uh, there’s not too many people that are wandering around that, um. Have $20 million net worths that are, are looking for this type of strategy.
And so it’s our, we feel like it’s our job to, to bring these things to, uh, the public’s attention and, uh, start looking for opportunities to, to pay less tax. Uh, if we felt like the government was effectively using our dollars, I think we might be okay with it. But if you don’t pay the IRS, you don’t pay the government, you don’t pay the taxing authorities.
The tax that, uh, they tell you to do. They start to take your property, you know, and, uh. I, I don’t like that. So, [00:53:00] uh, let’s, let’s do it. Compliantly, let’s, uh, pay the least amount of tax possible. And I think private placement life insurance is a, is a fantastic tool to, uh, uh, to help build this, this tax-free, uh, asset that, uh, you know, has tremendous long-term value.
So, Michael, the, the work you’re doing here is, is great. Uh, you can really help transform a, uh, an entrepreneur that’s frustrated by the tax to. Somebody that feels free of, uh, having to, to send huge checks to the IRS. So keep up the good work. Thank you. Well, thank you. Thanks so much for tuning into this episode of the Vital Wealth Strategies Podcast.
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