Insurance is fast becoming the hottest new thing in legal tax avoidance.
Insurance dedicated funds, or IDFs, introduced in the 2000s, provide investors with a legal way to avoid taxes – and they’re becoming so popular that big banks like JPMorgan Chase and Goldman Sachs are offering them, according to a Bloomberg report.
Here’s how the process works: The client purchases a private-placement life insurance policy, and the insurance company invests in alternative assets like hedge funds. Profits would usually be taxed as capital gains, according to Bloomberg – but because the process involves an insurance company, the profits can accumulate tax-free. When the insured person dies, his or her beneficiaries receive the money – and if the IDF was structured right, there won’t be any levies on death benefits.
“People use these partly for estate-planning reasons, but the main advantage is to let the value of these investments accumulate without any tax,” Alex Gelinas, a tax lawyer for Sadis & Goldberg, told Bloomberg. “That will always be an appealing feature.”
While it’s uncertain how much has been invested in IDFs, Aaron Hodari of Schechter Wealth told Bloomberg it’s at least $15 billion – about triple what it was a decade ago.
While IDFs are becoming more and more popular, the IRS has imposed strict rules on the funds, Bloomberg reported. For instance, insurers can’t invest in certain assets, and policy owners are prohibited from trying to affect – directly or indirectly – the investment decisions of IDF account managers.
“If the investor has too much control, the investor is taxed immediately,” IRS spokesman Anthony Burke told Bloomberg. “If the investor withdraws the amount, the investor must pay tax.”
Related stories:
Accountants get to escape sales tax on insurance products
Trump could withhold payments under Obamacare
.jpg)
