Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes." This was in 1789 before the national income tax. Today, this might read, “except death and constantly rising taxes.”

Make no mistake, the tax war is on. A 2015 Pew research poll study found that 61 percent of people surveyed say they are bothered “a lot” by the feeling that the wealthy are not paying their fair share of taxes.

And it goes all the way to the White House. The Obama administration issued a 2016 budget proposal that could eliminate the effective use of Grantor Retained Annuity Trusts, (GRATs), a widely used estate planning tool to transfer wealth between beneficiaries. With the uncertainty of the elections and pressure from both parties, family offices and wealthy investors must look to other means in order to protect their wealth. If you are a wealth advisor and have not addressed this with your clients, be assured that someone else probably already is. Registered Investment Advisors(RIAs) and Family Offices will need to take a hard look at what options remain for their clients.

Enter the Insurance Dedicated Fund

An Insurance Dedicated Fund(IDF) is an IRS compliant structure, defined under section 817 of the tax code, which has stood the test of time and scrutiny by the IRS for over 20 years and allows for tax-free or tax-deferred wealth accumulation. When coupled with Private Placement Life Insurance, an IDF can be an effective tool for, not only tax-free or tax-deferred wealth accumulation, but also asset protection and intergenerational wealth transfer. If you are about to stop reading because of the dirty words “life insurance,” I should point out that this is not the life insurance policy that your annoying nephew has been trying to get you to purchase for years. Private Placement Life Insurance (PPLI) is an exclusive form of life insurance available only to accredited qualified investors. “PPLI provides institutional pricing, which can be customized and negotiated to provide a low cost investment tax advantaged structure,” according to Leslie Giordani of Giordani, Swanger, Ripp and Phillips LLP.

So, the Insurance Dedicated Fund is essentially a vehicle that allows money managers in the U.S. to create a fund inside an insurance “wrapper” and manage multiple clients’ assets in a tax advantaged environment. However, there are very specific rules for an IDF:

• Investor Control: A policy owner can choose an investment manager but the investment manager has discretionary control of the investment selections.

• Diversification: The investments must be in a segregated account (IDF) with at least five positions in the investment. The IRS even lays out minimum percentages of assets that can be held in any combination of the minimum five positions to ensure proper diversification.

So how does a money manager use an IDF to manage their clients’ assets? There are several options available:

1. Choose an existing IDF: A money manager could simply find and use an existing IDF already approved on an insurance carrier platform. Each carrier will offer a selection, though often of limited variety, of investment options, or IDFs for any of their insured’s contracts. This is not often a viable solution for the sophisticated money managers looking to invest their high net worth client’s assets. In most cases, those managers, wish to use their own strategy.

2. Create your own IDF: For those sophisticated money managers, there is the option of creating their own Insurance Dedicated Fund. In this scenario, the investment manager can offer tax advantaged investment options for his clients and maintain discretionary control to utilize their own investment strategy.
Given the incredible compounding benefits of tax advantaged investing, why haven’t more RIAs and Family offices taken advantage of this tax-free or tax-deferred vehicle? The first reason is because many money managers do not like to discuss that nasty word, “insurance.” Beyond what we have already discussed about Private Placement Insurance, in reality the discussion around this structure should not be about the Insurance. It should be about using a compliant tax structure that allows the high net worth investor to legally enjoy tax-free growth on their tax-inefficient investments. Insurance should only be considered a secondary benefit.

The second, and most important reason keeping money managers from using IDFs is that coordination of setup can be difficult since these structures bridge insurance, legal and investments. CPA’s and attorneys can work with both insurance agents and investment advisors but the coordination between all parties can be difficult. To set up your own IDF, then you would have to understand the complexities of how to get your investment strategy approved on an insurance carrier platform. You may also be required to create their own IDF legal structure, which involves extensive compliance requirements, money, ongoing maintenance and due diligences of your fund. It could take up to a year to get the IDF structured properly and in compliance. Then, once the IDF is established, you would have to get it approved on numerous insurance carrier platforms, both domestic and international, requiring a substantial due diligence process. Hopefully the law firm that helped you create your IDF will have a relationship with the insurance carriers so that your IDF can be approved smoothly. Given this complexity, it is now understandable that only a very few wealth managers and family offices have gone through the hassle of creating their own IDF.

The Multi-Series IDF

Luckily, there is another option. Money managers can utilize a third-party Multi-Series IDF. Multi-Series Insurance Dedicated Funds have typically already been approved on multiple insurance carrier platforms. Multi series providers have a master fund and typically can carve out custom series for money managers. A money manager wanting to create his own fund inside an existing Multi-Series IDF would have a new “series” created, which can be done quickly and cost effectively. Certain multi-series funds, such as Copperstone IDF Services, allow for the money manager to white label their IDF so it appears from the client perspective, to be exclusive to that money manager. It is important to remember, that the RIA and FO do not have to sell insurance! They are merely managing the cash value of the policy from the insurance company for the benefit of the client.

The Multi-Series Fund not only streamlines setup, but also maintains ongoing compliance needs and reporting requirements, which allow the money managers to focus on growing their client’s investments. Many money managers have found having tax-advantaged options through a multi-series fund to be an effective tool for capturing new assets.

A client could even have their existing insurance cash values managed by their personal money manager instead of the high-cost limited options available in standard variable policies. Client’s existing annuities that were, until now, “stuck” in limited investment selections can now have them professionally managed and, in the process, perhaps even reduce the fees.

Partnering with the right multi-series provider can take many of the headaches away. Make sure you partner with a provider who is on multiple insurance carrier platforms. Having a varietyofcarrierswillensureyouaregettingthebestpricingpossibleforeachclient. Ifyou manage international clients, it may also be good to make sure your IDF partner is approved on international insurance carrier platforms. There are numerous benefits of offshore Insurance Dedicated Funds, but I will save that topic for later.


By creating a new “series” on a multi-series insurance dedicated fund, money managers can focus on managing money for absolute returns without the worry of tax drag on their strategy.

By using a multi series insurance dedicated fund they can also build a competitive advantage that will distinguish them and help to grow and retain profitable clients.

While Private Placement Life Insurance has been around for decades, it has not been until recently that the investment flexibility that advisors need has been available in a simple and efficient solution through a multi-series insurance dedicated fund. If you partner with the right MS IDF, this solution has significant asset gathering and retention potential for advisors seeking to grow their AUM and delight their clients. By choosing you as their trusted advisor, your high net worth clients can prove old Ben Franklin wrong. Taxes aren’t so certain!

Stephen B. Hilbert is vice president of distribution at Copperstone IDF Services