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Bernarda Pesantez
May 12, 2021

Global PPLI Income Tax Planning Strategies Regain Momentum as U.S. Tax Hikes Loom

Last week, media outlets reported that President Biden will soon propose that Congress almost doubles the tax rate applicable to long-term capital gains, effectively upending a century-old precedent of under-taxing investment relative to wages and salaries. If passed, taxes will go up at least to 43.4% and that would have a significant impact on investment planning for high net-worth and high-income households.

A couple of weeks ago, we shared our ,views and analysis on the different tax changes that the Biden Administration campaigned on, and are likely to turn into actual proposals.

In recent days, the rumors of an impending presentation of the tax reform proposal to Congress have been gathering steam and had everyone in the estate and tax planning space speculating as to what the effective proposals will be, what would be the new rates and brackets, or whether such proposals had any chance of being passed.

The White House seems set to propose almost doubling the capital gains tax rate for those earning $1 million or more, to 39.6% (from the current base rate of 20%). The way this would work is that for those with income of over $1 million, long-term capital gains would be taxed at ordinary income tax rates.

The 3.8% tax on investment income that funds Obamacare would be kept in place. Taking that into account, the move would send the top federal rate on the appreciation in assets to as high as 43.4%! Even worse, for some in high tax states, rates on capital gains could be catapulted above 50%. For example, for New Yorkers, the combined state and federal capital gains rate could be as high as 52.22%, and for Californians, it could be 56.7%.

These changes would overturn a century-old precedent of under-taxing investment relative to wages and salaries and will have a significant impact as to where assets are held. For example, investors should consider moving investment income portfolios or assets that will be kept over the long term to tax-deferred accounts.

At this point, we would like to remind our readers of probably the strongest and maybe even the last bastion for compliant income tax planning: Private Placement Life Insurance and Annuities (« PPLI »).

The Ferrari of income-tax planning

We at BFI have been using international PPLI for over 20 years for our clients interested in income tax planning and international investment diversification.

We like PPLI not only because it qualifies for income tax benefits under long established US tax rules and clear regulation, but also because it is highly customizable, provides a solid platform to invest internationally, and can be incorporated seamlessly into our clients’ estate plans.

PPLI contracts come in different forms (annuities or different types of life insurances) but all provide at least for income tax deferral on the contract’s underlying investments. If maintained properly, not only does PPLI remove income and capital gains from the US contract holder, reducing the US person’s tax bracket, but also has the welcome side effect of allowing for the assets to compound tax-free. Effectively, PPLI reduces income tax risk and increases investment growth opportunities.

Comprehensive PPLI Planning and Administration Services

Source: BFI Consulting Inc.

More sophisticated PPLI contracts provide, next to income tax deferral, income tax-free access to the contract basis, tax-free loans, or income tax-free death benefits in the hands of the US heirs.

PPLI addresses income (and capital gains) tax only. However, estate tax optimization can be achieved via extended planning. Both income and estate tax planning have become very relevant under the current fiscal environment. Although PPLI is not the only solution, it is one that, due to its contractual nature, we believe provides security in planning and preparing for the long-term.

While PPLI is a simple concept, the success lies in the details of the implementation and maintenance. Here is where an expert can help. We at BFI have been working with PPLI for over two decades and have in place an international network of insurance companies, banks, accountants, lawyers, and trustees at our disposal for the proper selection, implementation, and maintenance of PPLI.

We also have a myriad of ,articles and ,videos on this topic at our blog, that you are invited to review should you be interested in this topic.

,Contact us should you be interested in exploring whether PPLI could be a solution for you.

>> Read more here.

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