individual tax rates are going up as both the federal and state governments make desperate grabs for revenue.”
TARGET INVESTOR Choi adds that the types
of PPVLI currently being marketed are targeted to people from their mid-to-late 40s and mid-to-late 50s. “For middle-aged clients
who have the assets and liquidity to sustain the potential ups and downs of hedge fund investing, PPVLIs can be viable options to consider,” he says. “Still, we always advise our clients that PPVLIs are really long- term, higher-risk investments. There’s no guarantee our clients will achieve the kind of stunning results that insurance agents like to put up on their PowerPoint presentations. “Unlike a guaranteed death
benefit, the investments in a variable life insurance product are never set in stone.” Avoid estate tax on your
PPVLI by funding it with money that’s outside your estate, Bergman advises. Also, be aware there’s a certain amount of medical underwriting in order to qualify for PPVLI in the first place. “You have to be sufficiently
WHO SHOULD YOU TRUST AS A TRUSTEE?
I
f you have a significant amount of wealth to pass on, it’s crucial you decide who will manage your
money after you’re gone. If you set up a trust, one of the first questions will be, Who will be the trustee once you are gone? This is a major concern, since you are being asked
to find a surrogate, someone strong enough to resist heirs who may not want to follow your posthumous wishes. Often a trustee is a surviving spouse, but not always. Here are issues you will need to address when setting up a trust and choosing trustees:
1. Leave clear instructions If you don’t want your children to have access to their inheritance until they reach a certain age, spell it out. If you want them to have access to money for specific purposes, name those purposes. Not being clear creates a stressful situation for your family member trustee and could in time lead to resentment against that person and against you.
2. Name a co-trustee if your spouse needs help Often, it falls to one half of a couple to manage
the investments. If the half of the relationship who makes the tough calls is gone, a portfolio can quickly become rudderless. One solution is to involve your finance-averse spouse in the details of your collective affairs while you’re still alive. Another is to find a professional adviser who will step in as a co-trustee.
3. Name a successor trustee In time, the surviving spouse also will pass on.
Afterward, a successor trustee manages the trust. The successor trustee can be the same firm you name as a co-trustee to your spouse.
healthy for the company to want to insure you,” he says. “PPVLI is the penultimate tax shelter in the tax code, and it’s all legal, provided you follow a few simple rules,” says Jeffrey M. Verdon, head of Verdon Law Group. One such rule, Verdon says, is that
PPVLI premiums must be paid 4 out of the first 7 years to retain their tax- free status. If they’re not paid, the policy becomes a modified endowment
4. Consider a “directed trustee” Perhaps you are all set to hire a co-trustee to manage the funds you leave behind. Before you do, make sure you read the fine print. You might be surprised to find high fees. One solution is to hire a “directed trustee,” an adviser who oversees administration of the trust but does not manage money. Directed trustees generally have much lower fees. — Greg Brown
contract (MEC) that is taxed on withdrawals above the tax basis. The key to the success of a PPVLI
is leverage that comes from the power of tax-free compounding. “A 50-year-old who invests $8 million in
a PPVLI with an investment internal rate of return of 8 percent might be looking at $30 million after 20 years of tax-free growth,” Choi says. “In addition, assuming the MEC tax rules are met, you may be able to access the growth portion if the investment income is tax free during your lifetime.”
POWER OF COMPOUNDING Policyholders can borrow
as much as 85 percent of the cash value tax free as long as the policy is not a MEC. But Bergman stresses that leaving the money to compound tax free and sending the entire amount downstream for future generations without gift or estate tax concerns is by far the better option. “If you’re borrowing, you’re
reducing the benefit by taking money out of the policy,” he says. “Don’t consider using PPVLI as a bank account, because it’s not. It’s money to leave to your heirs.” However, even though he
discourages borrowing from PPVLI, Bergman adds that the possibility does provide a financial safety net. The nearly magical power
of tax-free compounding often seduces people to invest more than they should in PPVLIs, says Choi. “Even though PPVLIs are
technically life insurance products, they are actually investment vehicles and should be thought of in that manner,” he says.
“Like all investments, PPVLIs can,
and do, fail. Whether you should be investing through them really comes down to many factors, including long- term goals, liquidity, diversification, and risk tolerance.”
MARCH 2015 | NEWSMAX MAXLIFE 75
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