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Can tax savings come from private placement insurance?

Tax savings comes in many forms. While many individuals and businesses focus sound financial practices, others may flock to insurance to limit what is owed to Uncle Sam. According to a recent Bloomberg.com report, the use of insurance dedicated funds is becoming a mainstream method of providing a legal way to avoid paying taxes. These products have become so popular after being introduced in the midst of the last recession that major financial institutions are now offering them.

This post will provide a brief explanation of how they work.

A taxpayer starts by purchasing a private placement insurance policy, which is a variable universal life insurance policy that appreciates based on a separate investment account combined with a life insurance benefit. The purpose of such a policy is to maximize savings and while reducing a potential death benefit. 

The insurance company (or financial institution) invests in alternative assets such as obscure hedge funds. Indeed, profits are generally taxed as capital gains but if they are based on an insurance company’s earnings, they may not be taxed at all since an insurer must abide by certain guidelines.

While this has been tabbed as a “discreet maneuver” for years, it is estimated that as much as $15 billion is invested in insurance dedicated funds. Because of this, word of this strategy is growing quickly, and the IRS is watching.

If you have questions about the tax liability stemming from these accounts, an experienced tax attorney can advise you.

The preceding is not legal advice. 

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