“The World’s ‘Wealthy’ have a tax plan. ‘Never Pay Tax’! And South Dakota is teaching them how with virtual life insurance companies. These companies (which are licensed and properly funded) provide a Private Life Insurance policy…” These were the opening words on an email I just received. The email is describing a private placed life insurance product or “PPLI.”
We have written extensively about PPLI schemes recently. And with good reason. They are still making the rounds.
While we have no idea whether this particular product has any merit, we did note that the contact number on the email is a Swiss telephone number. In our experience, most PPLI products are considered abusive tax shelters by the IRS and many of them are offered by offshore promoters.
The headlines on these promotions are designed to catch your attention. “Never pay tax!” What a great concept. Since the United States enacted an income tax in 1913, promoters have been scheming away trying to figure out ways to avoid paying the government. 100 years and many criminal convictions later, the IRS is still on top.
So how does this particular PPLI scheme work? According to the email, “private life insurance is viewed as an insider’s secret for the world’s wealthiest…” By placing your business or investments inside your life insurance policy, the policy owns them instead of you. As profits roll in, you can borrow against the cash value of the policy and simply never repay the loans.
As stated in the email, “by stuffing” your investments inside the policy, the cash value of the policy can quickly grow. Then as the policy holder, “You can borrow up to 90% of your investment fund without being taxed. The loan can remain unpaid for decades. ”
These promotions really scare us. The IRS considers these type products to be listed transactions and abusive tax shelters. That means they are so questionable that the IRS requires you to disclose them on your return or face huge penalties.
In evaluating PPLI products, the IRS looks to see if there is a valid business purpose for the transaction. There has to be more than a simple desire to evade taxes. There must be economic substance. In determining intent, the IRS frequently looks at the promotional materials relied on by the taxpayer. When those materials say that unlike traditional life insurance policies, the focus of private life insurance is “tax elimination,” the alarms bells should sound!
In fairness to this promoter, his email does indicate that “There is a down side. The IRS has issued only a few private rulings on the product.” We don’t know enough about the PPLI being offered here since there are no details in the email. Telling folks they can “never pay tax” by “stuffing” their investments inside a private life insurance policy is certainly cause for concern, however.
Before investing in any PPLI product, we suggest getting a second opinion from a tax lawyer of your choosing. Many of these promoters offer slick marketing materials that include legal “opinions.” Unfortunately, some of these promoters are so slick that CPA’s and even lawyers have been duped by their offerings.
Get a second opinion by someone you choose. Want even greater protection? Consider paying for an IRS private letter ruling.
Not all private life and captive insurance arrangements are bad. There are enough abusive tax shelters found within the industry, however, that makes due diligence an absolute must. The tax, interest and heightened penalties associated with an abusive tax shelter outweigh any short-term savings. We say “short-term” because once the IRS finds out and disallows the arrangements, the tax and legal bills are likely to be huge.
If you are already in one of these arrangements, it may be able to hold the promoter responsible for any taxes and penalties as well as any lawyers or accountants that reviewed the plan. You will also need legal counsel to help negotiate away any penalties associated with the transaction. If the IRS views the scheme as a listed transaction, penalties can start at $100,000 or $200,000 per year.
Need help with reviewing a PPLI plan, defending an IRS audit or getting out of an existing plan? Give us a call. Our legal team concentrates on just two things; fraud recovery and tax law. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney – client privilege.