Private Placement Life Insurance Benefits for Crypto and Other Investors
The 1291 Group is excited to spearhead a wealth planning solution for investors, especially those holding crypto assets. With regulatory risks eroding the value of crypto holdings and increasing the friction of crypto-to-fiat off-ramps, crypto investors should start planning – now – while heading to the moon. If there is a lesson to be learnt from the past two years, it is that one should fix the hole in the roof before it rains.
By Benjamin Szeto TEP, Partner, 1291 Group
Our bespoke solutions deliver:
- Privacy and confidentiality
- Asset protection from hostile parties
- Tax optimisation
- Estate and legacy planning
- Cash and liquidity access
(We call this “PATEC”.)
How does it work?
We customise solutions using private placement life insurance (“PPLI”) to meet the complex needs of clients. This is a versatile type of insurance policy used by high net worth (“HNW”) individuals to achieve PATEC. This is life insurance on steroids.
In an “ordinary” life insurance transaction, the client enters into a contract with an insurance company (“Carrier”). Typically, the client pays a cash premium in exchange for the promise by the Carrier to pay out a death benefit to the beneficiaries upon the client’s demise. Once the transaction is completed, the cash premiums paid by the client belong to and become the property of the Carrier.
A PPLI is essentially similar, with the client also purchasing a life insurance policy. Instead of paying the premiums in cash, the client has the option of paying using other assets. These include financial instruments (e.g. equities, bonds, units in funds), precious metals, real estate, art, and crypto assets. The assets received by the Carrier are structured and held within the PPLI policy.
The Carrier holds the structured assets inside a special purpose entity (“SPE”), which serves an asset holding function. This SPE generally operates its own bank account (“Account”) to receive cash generated by and from the assets. Importantly, the client is not deemed to be the ultimate beneficial owner (“UBO”) of the structured assets, the SPE, or the Account.
When the client passes away, the Carrier will make an in specie payment of the structured assets together with a cash death benefit to the beneficiaries. Other payment permutations are permissible. There is also flexibility to nominate non-human beneficiaries such as a trust or a legal entity (e.g. a company).
After assets are structured, the Carrier becomes both their legal and beneficial owner. Because of this powerful legal alchemy, PATEC results. Yet this does not come at the expense of control, as the client may continue to exert influence over or management of the assets in the SPE via a limited power of attorney or the appointment of a asset manager.
Privacy and confidentiality
As the Carrier is both the legal and beneficial owner of the structured assets, the Carrier is deemed to be the owner of both the SPE and the Account. The Client’s name will generally not be disclosed because he is no longer the UBO. This is distinct from a common trust or family office arrangement under which the client’s name may surface as a beneficial owner.
- By using PPLI, a client with crypto assets will have access to a private Account, which would function as an off-ramp for conversion to fiat.
- If the client was previously a substantial holder of listed equities, he will no longer be disclosed as having any direct or deemed interest in these equities after injecting them into a PPLI policy.
- A client who holds assets under nominees (common in countries like Indonesia and Malaysia) can now consolidate control with complete confidentiality via PPLI.
- A client may utilise the SPE to make investments in various asset classes, maximising the privacy accorded by the structure.
- Parties who are illegitimately discriminated against (life is often unfair) may use the Account in the PPLI structure to ensure access to their funds is not impinged.
- The secrecy from the solution will accord greater security and peace of mind to HNW clients, diminishing the risk of serious crimes like kidnap, extortion etc.
Asset protection from hostile parties
Once the client’s assets are successfully structured within the PPLI policy, they cease to be part of his estate – he no longer has any legal or beneficial rights over them.
- If set up early and in the absence of fraud, structured assets can be ringfenced in less than six months from claims by a client’s creditors. This could be a game changer to a party who has granted a personal guarantee. And also a life saver to professionals (e.g. architects, lawyers, surgeons) who may be open to personal liability beyond the scope of insurance cover.
- Likewise, the client may use this solution to protect structured assets from claims in matrimonial proceedings and potentially limit alimony exposure.
The client can take advantage of tax savings or reductions once the assets are introduced into the PPLI solution.
- Structured assets generally experience growth free from income and capital gains taxes. This is especially pertinent to crypto assets, which can easily see enormous rates of return. Unstructured crypto assets could be subject to taxes in countries like Australia, France, India, Singapore, and USA.
- Tax optimisation from PPLI is advantageous to clients resident in countries that impose a regime of worldwide taxation (e.g. Australia, China, Indonesia, USA).
- PPLI may be effectively used to manage tax derived from controlled foreign corporation rules (e.g. China, Indonesia, Taiwan (soon)).
- Assets held under the SPE paid out as death benefit are not subject to inheritance tax in many countries.
- With pre-emigration planning deploying PPLI, expatriates returning to home countries with high tax bases could enjoy potentially large tax savings.
- A party who cannot make the cut for tax incentives (e.g. under Singapore’s sections 13D, 13O, and 13U exemptions on specified income derived from designated investments) may still profit from tax savings under PPLI.
Estate and legacy planning
The critical point to note is that structured assets are no longer part of the client’s estate. And that payouts upon death of the life assured are paid directly and expeditiously to beneficiaries of the policy, bypassing the time-consuming probate process. Ever versatile, PPLI can be a stand-alone solution or be combined with a trust to achieve a variety of outcomes.
- Many trustees have difficulty custodising crypto assets. A simple solution is for the client to structure his crypto assets into a PPLI policy and assign the trust as the policyholder. This resolves many of the associated risks trustees would face if they custodise such assets, whether directly or indirectly.
- For a client who does not desire the death benefit under the PPLI policy to be paid directly to the next generation (e.g. spendthrift or special needs heirs), a trust may be nominated as the beneficiary instead. When the client passes away, the carrier makes payment to the trust. The trustee subsequently administers the assets pursuant to the terms of the trust.
- If the client is resident in a country that imposes forced heirship laws, PPLI effectively provides freedom to the client in deciding how assets held within the policy are to be bequeathed.
- Payments by the Carrier under a PPLI policy are confidential. This means that clients with complex relationships may provide for all relevant parties discreetly. Crucially, family harmony can be maintained.
Cash and liquidity access
In addition to a death benefit (like “ordinary” life insurance), PPLI also accumulates cash values. This is largely dependent on the returns generated by the structured assets. A client could leverage off the cash values during his lifetime.
- A client may inject crypto assets into the SPE and subsequently convert them to fiat. By utilising the Account as an off-ramp, liquidity can be created. This is an alternative to using other crypto liquidity solutions that do not provide other PATEC plus points.
- If there is a need for cash, the client may take out a policy loan or make a partial surrender.
- Additionally, the Carrier may declare and distribute annual bonuses to the client for regular cash flow.
- A client may purchase a PPLI policy with a large cash death benefit so that, upon demise, his family would have sufficient liquidity to meet high death taxes (e.g. up to 55% in Japan and 50% in South Korea).
PPLI is a powerful tool. Its efficacy lies in how and, critically, when it is utilised. Time is indeed of the essence in our volatile, uncertain, complex, and ambiguous world. Clients can maximise PPLI’s potential by acting early and decisively. Talk to us today.
Disclaimer: This content is not tax, legal, financial, or investment advice. Neither is it inducement nor solicitation for the purchase of any insurance. Please seek professional advice before entering into any transaction described here.