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The Great Divide

The private placement life insurance industry has had several different starts and stops. The one thing that all of the different iterations of PPLI share is the recognition of the tax attributes of PPLI - 1) Institutionally priced; 2) Customized investment options; 3) Tax-free inside buildup of the cash value; 4) Tax-free loans and distributions; 5) Income tax-free death benefit; 6) Estate tax-free death build up.

The great divide in PPLI is between investment advisors, client advisors, and life insurers. Many involved in the industry might not even acknowledge that there is a great divide at all. The dividing line is the treatment of the investor control doctrine. In the early days, all carriers chased everything. As life insurers became more successful, they no longer needed to shoot at everything that moves. They became more orthodox and tended to act and feel like traditional insurers. The smaller insurers continued to live off the land and continued to hunt for everything.

For a number of years, professional advisors who treated the investor control doctrine liked the existence of Satan taking the view that it didn't exist. However, the Weber case much like the movie "The Exorcist" is a stark reminder that evil exists, and so does the investor control doctrine and it must be respected at all times.

When Rev. Rul 2003-91 and 2003-92 were issued, the sand started to shift and the trend towards insurance dedicated funds began. As part of that trend, the marketing of institutionally managed alternative investment options began. The earlier trend of positioning low basis capital assets within PPLI contracts got left behind.

Nevertheless, professional advisors who know and study the law, continued to study the investor control issue and have developed legal solutions to mitigate the tax and legal risk. As a law student, you learn that bad facts make bad law. The application of that doctrine to the Weber case actually resulted in a pretty good result for a policyholder who had the worst of facts.

As the great divide stands currently, one side of the divide wants the PPLI industry to resemble the retail market but with alternative investment options. The other side of the divide wants to implement the most sophisticated tax planning to accommodate a client's desire to utilize PPLI to own and manage tax inefficient investments or low basis assets with upside investment potential.

From where I stand, both sides of the divide looks pretty comfortable and have a good future. The elimination of one side of the divide has the potential of deconstructing a pretty good opportunity for both sets of clients.

The Great Divide
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