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Tax Avoidance Insurance Funds Gain Popularity

June 29, 2017

Insurance-dedicated funds are quietly but relentlessly becoming popular with wealthy clients as way to legally avoid taxes, Bloomberg writes.

Even large banks such as JPMorgan and Goldman Sachs now offer the instruments, which let investors move funds into private-placement life insurance products that are then invested in alternatives such as hedge funds, with the profits accumulating tax-free, according to the news service.

The newswire says many firms are reluctant to talk about IDFs, which at first were only popular with hedge funds. Bloomberg wasn’t able to get a comment from either JPMorgan or Goldman. And there’s no clear way to measure how much such instruments have attracted since their introduction in the 2000s, according to the news service. But Aaron Hodari, managing director of Schechter Wealth, tells Bloomberg there’s probably at least $15 billion invested in IDFs now – and that probably represents a three-fold jump from a decade ago, the news service asserts.

“Closed gatherings” where IDFs are discussed – such as conferences dedicated to life insurance and annuities – have recently attracted people from Goldman, as well as employees of Third Point, Golub Capital, York Capital and GoldenTree Asset Management, according to Bloomberg. All firms declined comment to the news service.

If done efficiently, IDFs let beneficiaries collect the money invested upon the policy-holder’s death without incurring the death-tax – and the impact can be significant. Assuming a 6.5% internal rate of return, a $2.5 million annual contribution to an IDF over four years by a non-smoking 45-year-old man would turn into $113 million in 40 years, compared to $48.8 million if the investor had paid taxes, according to a Giordani, Swanger, Ripp & Jetel presentation cited by Bloomberg.

However, the Internal Revenue Service does go after investors who withdraw the funds prematurely or are involved in investment decisions over the funds, according to the news service. Nonetheless, that hasn’t turned off anyone from IDFs, according to Hodari, who tells Bloomberg that the mood at presentations dedicated to IDFs “is great.”

By Alex Padalka
  • To read the Bloomberg article cited in this story, click here.