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A private placement life insurance (PPLI) policy is a form of life insurance that is individually negotiated with a life insurance company, as opposed to an investor buying an off-the-shelf product such as are commonly sold. Such PPLI policies are usually very large life insurance policies, with total premiums paid usually in the $5 million range and up, and are frequently used in the estate planning for very wealthy individuals. Because they are negotiated individually with the life insurance company, PPLI policies can sometimes be more efficiently used than similar off-the-shelf products in estate planning scenarios.

Nearly all PPLI policies are of the variable universal life (VUL) type, which means that the premiums received by the insurance company are deposited into an investment account that defines the cash value of the policy, less the insurance company and death benefit expenses, and then the money in the policy is further divided into various sub-accounts, almost always some investment fund, where the real investment activity takes place. If the investment experience in the sub-accounts is good, then the cash value of the policy will increase; if that experience is bad, then the cash value will decrease.

PPLI has been around since the mid-1990s, so going on 30 years. It was a very hot product in the late 1990s as a tax shelter that sought to place a tax-free wrapper around hedge funds investments that can throw off a great deal of taxable income due to their short-term arbitrate investments. Around the turn of the century, however, new guidance was promulgated which had the effect of preventing PPLI policies from investing directly into ordinary hedge funds that were generally available to everybody (or, at least, all sophisticated investors), and that basically killed off the PPLI market for some years. As investment companies slowly started offering investments that were only and exclusively available to PPLI policies, and otherwise navigated around the guidance, PPLI slowly started to come back to life around 2010 and is somewhat commonly used today for wealthy individuals in estate planning scenarios.

From a tax viewpoint, most PPLI policies can be parsed into two categories, being benign and malignant. In the benign category are those PPLI products that basically function like ordinary VUL policies, but can be more efficient. Negotiating a PPLI policies allows the investor to dial down commissions (i.e., reduce the commissioners paid to the selling broker) and sometimes the expenses paid to the life insurance company which thus allows for more of the investor’s money to be working money. With very large policies, this is no small benefit ? it is also why ordinary life insurance agents detest PPLI as every PPLI policy sold basically represents the loss of a rare “whale” policy with oversized commissions.

Another benign benefit of PPLI policies is that those policies sometimes have access to certain investments that are not commonly available to off-the-shelf VUL products, including sometimes investment funds that have exotic investments or exotic trading strategies. Just like ordinary VUL policies act as basically a sponge to soak up the otherwise taxable gains from investments, the investments within a benign VUL policy are not taxable to the investor. Further, the first-in, first out (FIFO) accounting rules means that an investor can borrow the cash value of the PPLI policy tax-free up to the amount of the initial investment into the policy, just like an ordinary VUL policy. Finally, at death the proceeds paid to policy beneficiaries are tax-free.

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As good as all this is, no VUL policy ? including PPLI policies ? are a free lunch, and whether they are a good investment or a bad investment depends largely upon when one dies. If one dies early, then the policy will turn out to be a great investment; however, if one lingers deep into old age, then the insurance cost of the death benefit (which is inherently very large with a PPLI policy) will substantially eat away at the policy value and they can become a pretty lousy investment. This is true of all life insurance. Moreover, if the investment performance is not at least minimally as expected, as one lingers into old age the cash value of the policy can be wiped out entirely and the policy will fail for the inability of the policy to sustain the insurance cost of the death benefit, which happens a lot more frequently than insurance companies would like for folks to know. But if one dies early enough, then there can be a substantial windfall to the policy beneficiaries.

We now turn to the malignant version of PPLI (one might use the alternate adjectives of “aggressive” or “abusive”) that is the subject of today’s discussion. One such transaction that went around involved the selling of an operating business interest into the PPLI policy, such that the bulk of the profits of the business were upstreamed into the tax-free investment account of the policy so that the business owner avoided the tax on that income. With this transaction, the PPLI policy became little more than a tax-free wrapper for the income of the operating business, and other contrivances were implemented so that the owner could soon take back the money via policy loans or otherwise without taxes on that income ever being paid.

Other abuses of PPLI policies are illustrated by the Press Release of the U.S. Attorney’s Office for the Southern District of New York, which on May 14, 2021, obtained a deferred prosecution agreement (DPA) from Switzerland’s largest insurance company of three of its subsidiaries for using its PPLI products to assist U.S. taxpayers in committing tax evasion. To illustrate the severity of the violation, the company, Swiss Life Holding AG, will pay $77.3 million to the U.S. Treasury as restitution, forfeiture of all gross proceeds, and penalties.

The DPA follows a criminal information filed against Swiss Life, and its three subsidiaries: Swiss Life (Liechtenstein) AG, Swiss Life (Singapore) Pte. Ltd., and Swiss Life (Luxembourg) S.A., for conspiring with U.S. taxpayers and others (read: their professional advisors) to conceal more than $1.452 billion in assets and income from the IRS through the use of their PPLI policies. The DPA requires Swiss Life to refrain from future criminal conduct, to implement certain remedial measures, and “continue to cooperate fully with further investigations into hidden insurance policies and related policy investment accounts.” This latter phrase means, of course, assisting the IRS and DOJ with criminal investigations and prosecutions of the U.S. taxpayers and their facilitators.

According to the press release, from 2005 to 2014, Swiss Life and its subsidiaries maintained at least 1,608 PPLI policies for U.S. persons and many of these were used to evade U.S. taxes, IRS reporting requirements, and conceal the ownership of offshore assets. Among other things, when Swiss financial giant UBS began terminating its tax evasion relationships with U.S. clients around 2008, Swiss Life saw an opportunity to step into UBS’s shoes by “onboarding U.S. clients where were fleeing UBS and other Swiss banks.”

The press release also recites that many of the Swiss Life policies for U.S. persons were funded through asset transfers involving various offshore law firms and intermediaries. Swiss Life would also assist in maintaining the PPLI policies for the ostensible benefit of a foreign relative of the U.S. person so that money could later be repatriated to the U.S. person by way of a “sham death payout.” Often, the PPLI policies involved transfers of gold, precious metals, gemstones, and the like, for the very purpose of avoiding detection by the IRS. Swiss Life also allowed third-party recipients (frequently, the U.S. person’s advisor) to receive documents instead of the U.S. person receiving them directly. Finally, Swiss Life effectively laundered “so-called ‘black’ money into so-called ‘white’ money” by parking the funds in a PPLI policy until the statute of limitations had run for the “black” money.

The DPA requires Swiss Life to disclose all of its accounts for U.S. persons between January 1, 2008, and December 31, 2019, but the agreement does not provide protection for any person against prosecution. The press release also relates that Swiss Life has already provided a great deal of information to the DOJ and has basically urged many of its U.S. clients to come clean. The upshot of all this is obvious: The DOJ is preparing to go after Swiss Life clients for tax evasion, and Swiss Life has given them quite of bit of ammunition already.

The Swiss Life DPA, and their cooperation in revealing the offshore assets and income of U.S. tax evaders, again reveals something that I have often pointed out about “secret” offshore accounts: Somebody knows. Although companies like Swiss Life which help to facilitate such tax evasion can spin a good story about how secret their files are kept, or how the secrecy laws of their home countries will prevent any disclosure, the truth has proven over the years to be quite the opposite. Banks and financial institutions are actually quite fragile creatures, and it doesn’t take that much to pressure them into handing over the goods to investigators — often, just threatening to cut them off from the New York financial markets by way of a criminal prosecution is more than enough. There is also the threat that some disgruntled employee will download client information onto a flash drive and sell that information to the fiscal authorities, which has happened quite a few times in recent years.

Doubtless the next we will read about Swiss Life’s PPLI products will be in the future indictments of the U.S. persons who had such undisclosed policies, and their advisors who helped them facilitate these deals. That should make for some very interesting reading, as the IRS and DOJ will probably make a few select examples out of some as a warning to the rest. It is, frankly, long past time for the IRS to make some varietals of PPLI policies a listed transaction and kick the regulation of these products into a higher priority.

Again, not all PPLI products are ipso facto illegal, or even abusive. Some are in fact quite legal, even if often of dubious real benefit once you get past the pie-in-the-sky illustrations. But if the PPLI policy is offshore and full disclosures are not being made, then it is probably less of a good idea and more of something that portends of spending a few years of eating liver and onions with a spork.

CITE AS

Press Release, Switzerland’s Largest Insurance Company And Three Subsidiaries Admit To Conspiring With U.S. Taxpayers To Hide Assets And Income In Offshore Accounts, U.S. Attorney’s Office for the Southern District of New York, May 14, 2021, as found at https://www.justice.gov/usao-sdny/pr/switzerland-s-largest-insurance-company-and-three-subsidiaries-admit-conspiring-us

Deferred Prosecution Agreement (with exhibits) of April 16, 2021 at https://www.justice.gov/usao-sdny/press-release/file/1394191/download

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