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Larry Rybka. (Photo: ValMark)

Life Health > Life Insurance > Life Planning Strategies

The IRS Hates What Some Wealthy Clients Put in Their Life Policies: Larry Rybka

By Allison Bell

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The IRS looks as if it’s about to go after wealthy investors who tried to put assets they really control inside private placement life insurance policies, according to a life insurance distribution veteran.

Larry Rybka, CEO of Valmark, said, in an email interview, that any wealth advisors, life insurance agents or others who have helped high-net-worth clients put the stock of private companies or the similar types of assets inside PPLI arrangements should be paying close attention to any messages about PPLI coming from Senate Finance Committee Chair Ron Wyden, D-Ore.

Wyden has asked Lombard International, Prudential Financial, Zurich and the American Council of Life Insurers for information about the PPLI market.

“These data requests will show those that have been aggressive with the investor control line will find themselves at the center of focus, especially when the IRS is hiring 87,000 more auditors,” Rybka said in an email interview.

Rybka may be best known as a leader of the fight to stop life insurers and life insurance producers from using what he believes to be misleading illustrations of how indexed life insurance products might perform.

What It Means

Advisors who have helped clients set up existing PPLI arrangements should be reviewing their records and talking to their compliance advisors.

Advisors who have clients with PPLI arrangements set up by other financial or legal professionals may need to help those clients explore their options.

For high-net-worth clients who are setting up life insurance and other financial arrangements now, advisors may want to think carefully about how to set up PPLI arrangements that can stand up to increased IRS scrutiny, or about identifying alternatives to PPLI arrangements.

Private Placement Life Insurance

A private placement life insurance arrangement may give a wealthy individual or family a way to set up a big, customized cash-value life insurance policy.

A PPLI policy might have lower administrative costs than an ordinary life insurance policy, and it might offer freedom from policy size limits and other constraints that might face a wealthy client who wants a very high level of death benefits.

Lion Street, an affiliate of Integrity Marketing, reported earlier this year that it found that three carriers that made PPLI information available had about $46 billion in assets under administration in PPLI arrangements.

About 80% of the PPLI business consists of corporate-owned life insurance, with most of the assets invested in ordinary registered investment funds, Rybka said.

But the U.S. Government Accountability Office talked generally in 2020 about the possibility that PPLI arrangements could hold other types of assets, such as private stock, and be used in an illegal way to evade U.S. taxes.

Last year, the IRS and the U.S. Justice Department arranged for Swiss Life Holding to pay $77 million in connection with allegations that the company had helped customers hide $1.45 billion in assets inside 1,608 PPLI policies. The payment included $16 million in restitution of unpaid taxes; $36 million in payments meant to offset profits Swiss Life had made; and $25 million in fines.

Investor Control

Investor control is an issue, because income tax rules are different for assets held inside and outside of a life insurance policy.

The IRS does not classify a life insurance policy as an arrangement that can benefit from life insurance policy tax rules if the assets inside the policy are under the control of the policy owner.

Brian Balduzzi and Bryan Bloom, Faegre Drinker attorneys, wrote, in a commentary supporting the value of properly structured PPLI arrangements as a wealth planning tool, that a PPLI policy must be maintained with a minimum death benefit and must satisfy IRS investor control and investment diversification requirements.

“If a policyowner is held to have breached this investor control doctrine, the policyowner may be required to include all interests, dividends and other income earned by the policy assets in his or her gross income for the taxable year,” Balduzzi and Bloom warned.

Valmark CEO Larry Rybka. (Photo: Valmark)

Allison Bell

Think_Allison

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