Private Placement Life Insurance (“PPLI”) is a form of life insurance that has been in use in the US and Europe for many years. Clients in Asia have utilized PPLI for several years but in a limited form and is mostly underused in Asia. The reason for PPLI being underutilized is partially because it is not well understood. It is also that since the Automatic Exchange of Information (‘AEOI’) and the Common Reporting Standards (‘CRS’) have come into play that some of the features of a PPLI are suddenly extremely useful in wealth planning.
Some people think of PPLI as a ‘101’ policy – the ‘1’ being life cover, and the ‘100’ being the assets transferred to the insurance carrier. A PPLI is much more than this. The concept of PPLI is better understood as using life insurance as a tool for generational and estate planning by ‘transferring your assets into the name of an insurance company’ in the same way that setting up a trust involves ‘transferring your assets into the name of a trust company.’ (A Variable Universal Life (‘VUL’) insurance policy is actually a subset of PPLI.) The assets to be transferred can (depending on the insurance carrier) include BVI company shares under which you may hold your family business, your real estate, as well as financial assets with various banks. PPLI can thus be seen as an asset holding structure, similar to a trust, but a structure that can bring significant benefits to clients.
What are the Benefits of a PPLI?
Firstly, with substantial assets transferred into the name of an insurance company, the value of these assets now constitutes a ‘premium’ on your life policy. Depending on the extent of life cover needed by the client, a substantial amount of life cover can be obtained through a PPLI, while the financial assets stay managed by your bank or your independent asset manager.
The cost of insurance charges are deducted over time rather than upfront, as with some other life policies. The cost of insurance payments is paid from the income gains from the policy investments. This is beneficial for clients. PPLI insurance costs can be further reduced if necessary, as the life cover can be reduced over time if the client wishes. Perhaps when children have grown up or mortgages have been paid off.
Secondly, withdrawals can be made from the PPLI at any time, so clients have extensive flexibility.
The last benefit for clients is the avoidance of probate, and having a distribution plan, in a similar way as you do with a trust, but with three significant advantages:
- The legitimate tax deferral can be achieved n nearly every jurisdiction.
- More discrete CRS disclosure – the insurance company reports the policyholder and the policy surrender value.
- Unlike trusts, a PPLI contract is recognized in both common law and civil law countries.
Which is a better holding structure - a Trust or a PPLI policy?
The answer is that they both have their advantages.
A trust can potentially last forever, whereas a PPLI policy pays out on the death of the life assured. Consequently, distributions from a trust can be staggered over generations. This is not the case with PPLI, where the distribution happens upon the death of the life assured.
Irrevocable trusts can provide creditor protection while the settlor can remain a discretionary beneficiary, whereas a PPLI policy structured to protect against creditors will usually require an irrevocable appointment of benefit to persons other than the policyholder.
Finally, some trustees will quote flat fees for the trust set up, which may be more attractive than charges based on the assets under management (AUM) often found with PPLI insurance policies.
However, a PPLI has some significant advantages over a trust.
Under CRS rules, trusts with the underlying asset value are reported back to authorities, and in some cases, to countries that do not recognize trusts. Indonesia, as a civil law country, for example, regards trusts as transparent for tax purposes. The Indonesian tax authority will look through the trust, and usually find a BVI company, which they now treat as a Controlled Foreign Company (‘CFC’), and then tax the Indonesian resident settlor. If the assets were held in a PPLI policy, there would be legitimate tax deferral for the underlying assets, as the PPLI policy today would not fall under the controlled foreign company rules.
We wait to see what happens as trusts are reported back to the other Civil Law countries such as China and the Philippines. Therefore using a PPLI policy gives more certainty of planning, as insurance is recognized and legislated everywhere, and tax deferral can usually be achieved.
It may also be easier to hold more complex assets under a PPLI policy. For example, in Malaysia, a lot of wealth is held onshore. Suppose the shares of a Sendirian Berhad (under which may be Malaysian real estate, land, etc.) are transferred into the name of an offshore insurance carrier. In that case, offshore life cover is purchased for the client, allowing the life proceeds to fall into an offshore trust for future generations, thus deriving more value from the onshore assets.
PPLI as a solution for Asian clients
Solutions can be designed for many different situations across Asia. The solution for many Asian clients may often involve using PPLI as the asset holding vehicle today, but with a trust set up to be the beneficiary of the policy after the lifetime of the life assured. The best of both worlds can be achieved, maximizing the advantages of each structure.
We have already mentioned Indonesia and Malaysia above. So, where are the other opportunities today?
Thailand - PPLI as a solution for Inheritance Tax
In Thailand, Inheritance Tax on worldwide assets was introduced in 2016. The Thai Inheritance Tax has not had a significant impact yet. It was reported that no inheritance tax was paid at all in the first year since its introduction. However, CRS will be introduced in Thailand in 2022, with the exchange of information scheduled in 2023. Solutions for the Thai inheritance tax should involve PPLI in the structure, and clients need to start thinking about this now.
Taiwan - CRS reporting
In Taiwan, Controlled Foreign Company legislation was introduced in 2017, with the implementation date yet to be announced. Taiwan is also starting to sign bilateral treaties on the exchange of information. Many Taiwanese hold their offshore assets today in private investment companies, which shortly will no longer work. Taiwanese high-net-worth individuals who are concerned about CRS reporting should consider solutions involving PPLI.
Offshore Assets in High Tax Jurisdictions
Many Asian clients also have connections with high tax jurisdictions such as the US, the UK, and Australia. These connections might be family beneficiaries living in these high jurisdictions where taxation on global assets could become a potential problem.
Even a US Green Card can bring full exposure to US tax on worldwide assets.
The good news is that these countries (US, UK, and Australia) have favourable rules permitting legitimate tax deferral for properly constructed structures using PPLI policies.
Of course, planning is best done as early as possible and usually (but not always) before family members become tax residents of those high jurisdiction countries.
PPLI set up at Envysion Wealth
In conclusion, there is an exciting wealth planning tool available, which has been little known and misunderstood in Asia. For banks, asset managers, trustees, and everyone involved in finding client solutions, there is now a timely opportunity to better serve clients and enhance their business offering.
Envysion Wealth Management is a licensed wealth manager with services that include solutions for wealth transfer and setting up structures and solutions for our clients. Our role is to advise and find you the most relevant solution to solve your problems. Contact us for more information on our services.
Contact us for more Information on our PPLI advisory and set up services
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