EFTA01454208.pdf

By Edward J. Finley II & Michael Liebeskinci Private Placement lariabiL Annuities A powerful tool to address income tax planning uses for high-net-worth individuals ncreasing taxes on the wealthy is very much part What It Is I of the national dialogue. Most believe it's inevitable that marginal income tax rates will go up, especial- ly for the clients we typically advise. At a minimum, A PPVA is an annuity that's been stripped down to its most basic element gains are deferred from current period taxation (PPVA investment accounts). there will likely be higher taxes on dividend income and, perhaps, all investment income. And, things like What It's Not the charitable income tax deduction seem perilously L It's not a retail annuity. PPVA isn't a traditional at risk. annuity product. Most advisors are familiar with the The federal government is very focused on rais- high cost and limited investment choices of these ing revenue, especially from Americans living abroad products. PPVAs don't have the often expensive (evidenced by the Foreign Account Tax Compliance bells and whistles of retail annuity products, such Act (FATCA) and other new reporting requirements). as income guarantees or protection of principal Sophisticated investment vehicles tend to generate in the event of premature death (which generally investment gains that are subject to the highest effective add an incremental fee of 100 basis points (bps) to tax rates. And, especially relevant for foundations, many 200 bps annually). Instead, PPVA investment sophisticated investment vehicles generate unrelated accounts generally have no upfront commission business taxable income (UBTI). Most high-net-worth loads or premium tax charges, and assets can remain individuals can shelter a paltry amount of their retire- invested until a client chooses to take a one-time ment savings from income tax, making it all the more distribution or systematic payments over a specified difficult to achieve their retirement objectives. Taken period of time (often referred to as annuitization). together, these trends create significant income tax plan- The client isn't required to begin taking distributions ning challenges for high-net-worth clients. until he reaches age 95 or 100, at which time most Advisors should consider using private placement insurance companies require the account to be liqui- variable annuities (PPVAs) to address these issues. A dated over a period no longer than 30 years. powerful yet simple tool compared to other planning alternatives, PPVAs are often overlooked. Well explore 2. It's not a contrivance. PPVAs are specifical- the opportunities for using PPVAs, as well as the ly authorized under Internal Revenue Code Sec- mechanics for implementing them. tion 72. The Internal Revenue Service has repeat- edly considered and ruled favorably on PPVAs, and, in 2008. issued clear safe-harbor guidelines for Edward J. Finely It. tar left, is managing director how investment funds offered within PPVA invest- at Deutsche Bank Private ment accounts (which are referred to as "insur- Wealth Management in New ance-dedicated funds* or IDFs) must be structured York. Michael Uebeddnd is and administered to qualify for favorable tax treat- co-founder of SALI Fund ment.' The client may make deposits into the PPVA Services in New York investment account in any amount and at any time. DECEMBER 2012 TRUSTS & ESTATES / wealthmanagennent.corn 21 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 8(e) DB-SDNY-0112189 CONFIDENTIAL SDNY_GM_00258373 EFTA01454208