To Be or Not to Be: Contemplating Wealth and Legacy
As I reflect on life, I’m reminded of the profound questions Shakespeare explored. High school, with its pivotal moments, feels a bit like deciding whether to be or not to be. During my time at Culver Military Academy, battling a blizzard and the flu, I was forced to make decisions. Taking a long walk in that weather felt like a ‘to be or not to be’ moment. This article will share an investment strategy that could create some very good outcomes.
My British high school Shakespeare teacher never had me learn Hamlet, though I’ve seen many stage and screen productions over the years. This article will explore a strategic financial move, Private Placement Life Insurance (PPLI), and how it can play a key role in estate and tax planning for high-net-worth individuals, even billionaires.
Hamlet, a timeless exploration of life’s fundamental questions.
The “Buy, Borrow, and Die” Strategy
The concept of “Buy, Borrow, and Die” (BBD) has been around for a while. It involves a high-net-worth individual acquiring assets, borrowing against them, and ultimately passing them on to beneficiaries, often with significant tax advantages. Here’s a breakdown:
- Buy: Acquire appreciating assets like real estate, stocks, or collectibles.
- Borrow: Leverage the increasing value of those assets to fund a lifestyle.
- Die: Upon death, the assets are passed to heirs, potentially tax-free.
This strategy isn’t limited by income or net worth and is available to all taxpayers. Capital assets aren’t taxed until they are sold. Borrowing against assets is common, but lenders have limits. Loan proceeds are tax-free to the borrower. Upon death, assets receive a step-up in basis to the date of death value, allowing heirs to sell without incurring taxes to repay any debts against the assets.
PPLI: The Preferred Asset for the BBD Strategy
Private Placement Life Insurance (PPLI) is a variable universal life insurance policy with customized investment options. It is a highly tax-advantaged asset. Life insurance has had favorable tax treatment since the federal income tax was adopted in 1913 and continues to be so across the globe. High net worth taxpayers play according to the same rules as everyone else under the Internal Revenue Code when it comes to life insurance. PPLI has significant advantages within the BBD strategy.
PPLI provides tax-deferred growth of cash value, and investment income accrues tax-deferred. The death benefit receives tax-free treatment. Policy loans, up to 90% of the policy account value, can be accessed tax-free during the insured’s lifetime. Loans are non-recourse, secured by policy assets, with interest rates that vary. The loan interest may be paid currently or accumulated to the loan balance, which is repaid from the policy death benefit. The death benefit is always more than the accumulated loan.
Advantages of PPLI in BBD
PPLI offers several advantages over a standard BBD approach.
- Tax Advantages: Income typically earned on capital assets, such as rent, lease income, or dividends from public equities, is taxable. However, within a PPLI policy, all income is tax-free.
- Enhanced Borrowing: Traditional BBD methods have borrowing restrictions. PPLI allows for borrowing up to 90% of the policy’s account value. The loan interest can either be paid currently or accrue. At death, the death benefit is reduced by the outstanding loan balance, but the benefit is received income and estate tax-free. There is no cancellation of indebtedness tax consequences. The step-up in basis typically associated with the BBD strategy means capital assets are included in the estate and subject to estate taxes while PPLI avoids unnecessary complications.
- Investment Flexibility: PPLI offers superior investment versatility. The loan requirements for PPLI remain fixed, and the amount is based on the fair market value at the time of the loan, unaffected by market fluctuations. PPLI planning can be sustained for 80-100 years beyond the taxpayer’s lifetime.
Conclusion: The Future of Wealth Planning
Buy, Borrow, and Die is a sound strategy. PPLI makes it much better. The rest is silence!
