The chairman of the U.S. Senate’s Finance Committee is pushing legislation that would impose new tax reporting requirements on the private placement life insurance market, which he says is abused by ultra-wealthy people looking to dodge taxes.
“Legislation is needed to increase oversight of PPLI and curb abuse of these products as tax avoidance by the wealthiest 1% of Americans,” said Chairman Ron Wyden, an Oregon Democrat, in a statement released today. Wyden is spearheading legislation to this end.
His announcement today coincides with the committee’s release of a report on its 18-month investigation into the private placement insurance market.
The investigators found that private placement insurance policies “are actively promoted to millionaires and billionaires as a way to transfer significant wealth to their heirs while bypassing income, gift and estate taxes.”
The report calls the marketplace “a tax-shelter made up of at least $40 billion in policies held by only a few thousand individuals, who have net-worths reaching into the hundreds of millions or billions of dollars.” Just 3,000 families in the U.S. own such policies, investigators found.
The marketing materials obtained by the committee from the market’s largest providers promoted private placement life insurance policies as tax-free investments in private equity and hedge funds, as well as vehicles to dodge income, gift and estate taxes while facilitating the tax-free transfer of wealth to their heirs, the report said.
For example, a brochure from Prudential, one of the top seven private placement life insurers in the U.S. questioned by investigators, promoted its policy as a way to achieve “a death benefit that is generally free from federal income taxes [and] freedom from annual taxation of any cash value that accumulates” as well as offering “preferred pricing for qualified purchasers [and] an extensive selection of underlying investment options.”
“I’m a strong defender of life insurance as a source of financial security for hardworking American families and retirees, but that’s not what’s going on with these tax-dodging private placement policies that are available only to the ultra-wealthy,” Wyden said.
“When you subject these policies to even the slightest bit of scrutiny, it’s clear that this is just a tax shelter for the investments of the mega-rich masquerading as life insurance. None of this is available to middle-class Americans,” he added.
According to Wyden, the Finance Committee’s investigators found that policyholders were able to borrow against the assets at extremely favorable rates. He called the policies “buy, borrow, die tax shelters.”
His legislation seeks, among other things, to reform the reporting of these policies on tax forms. He says there’s no requirement that people report ownership of private placement life insurance on a tax return, and this allows wealthy policyholders to use the insurance “to shield lucrative investments in alternative assets from scrutiny by the IRS,” said the report, which also suggested that specific ownership reporting and IRS access to investors’ foreign bank account reports (FBARs) would help the agency collect billions in taxes.
While industry pundits, including attorneys who represent private placement insurers and brokers, have said that this insurance is completely legal and argue there are already regulations on the books to regulate abuses, “the IRS is largely unable to enforce investor control rules in place to prevent the abuse of tax-advantaged financial products like PPLI,” the report said.