November 26, 2020 - Douglas Myser

Insurance policy avoid tax. The new hot thing in tax avoidance has a boring old name: insurance dedicated funds. Introduced in the 2000s, IDFs have become  so mainstream that banks such as JPMorgan Chase and Co. and Goldman Sachs Group Co. are offering them. Hedge funds like Paulson & Co. and Israel Englander's Millennium Partner's LP have been managing them for years. For investors, the products provide a legal way to avoid taxes. For investment firms, the premiums are "sticky"--they make for stable, long term sources of capital that act as a bulwark against client redemptions at a time when clients just puled $75.6 billion from hedge funds in the five quarters through March, according to Hedge Fund Research. Insurance policy avoid tax.

Here's how it works: The client buys a private placement life insurance policy. The insurance company invests in alternative assets such as hedge funds. Profits, if any would be ordinarily taxed as capital gains, but because it involves an insurance policy, which must abide by certain restrictions, the money can grow tax free. Beneficiaries get their money when the insured person dies. Many IDFs are life insurance policies, but they also come in the form of annuities, which have different tax implications. There's no official accounting of how much money has been invested, but according to Aaron Hodari, who keeps tabs for Birmingham, Michigan based Schechter Wealth, it's at least $15 billion, triple what it was a decade ago.

Tax status makes a clear difference. If a 45 year old, non smoking man were to contribute $2.5 million to an IDF for four years, the investment would be worth $113 million within 40 years with a 6.5% internal rate of return, according to a presentation by wealth planning law firm Giordani, Swanger, Ripp & Jetel. The account value would be $48.8 million if the investor paid taxes, the document shows. The rising use of an insurance policy among the wealthy widens the gap between the rich and pool, said Gabriel Zucman, an economics Professor at the University of California at Berkley. Insurance policy avoid tax.

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