Terence L. Horan, CLU, ChFCPresident & CEO

Terry leads an energetic and focused team to deliver the most current and comprehensive health, wealth and life services. HORAN’s professionals help solve the two greatest challenges facing Americans today: access to affordable health care through the bridge of insurance and managing assets to support a long retirement and transfer to the next generation.

High-net-worth clients are facing the highest income tax rates in recent history, and as a result, are making income tax planning a priority. These individuals understand that what one “keeps” is more important than what one “earns.” A Private Placement Variable Annuity (PPVA) can provide significant advantages with low cost, tax-deferred accumulation of funds. The PPVA framework allows for tax-efficient investing with multiple investment opportunities, the benefits of which can be further leveraged if the client has charitable intent.

Clients who invest in a PPVA are interested in diversification strategies that allocate a portion of the wealth to investments with high growth opportunities such as hedge funds. These investments are traditionally income tax inefficient. Advisors are increasingly recommending that these investments should be located within the framework of a PPVA because the annuity shields the investment from current taxation.

Fund managers are increasingly interested in creating “tax-deferred” structured, insurance-dedicated funds to be used in Private Placement products. Private Placement Variable Annuities are institutionally priced, variable-deferred annuities designed to hold these investments. Because of the sophisticated offerings, PPVAs are available exclusively to accredited investors and qualified purchasers.

What are some of the characteristics of a PPVA?

Clients use the PPVA for assets earmarked ultimately for charity or private foundations they are uncomfortable parting with presently. Other clients would like to purchase a replacement annuity with lower expenses. These annuities are also for clients who want to increase tax-deferred savings. Two examples are presented to illustrate the benefits of the PPVA product.

In the first example, the clients are a married couple with $5 million earmarked for a public charity. The couple wishes to retain access to the $5 million during their lifetime in case it is needed. Otherwise, if the funds are not consumed during the couple’s lifetime, the proceeds will go to the charity.

The couple invests the $5 million in a PPVA. The husband is the annuitant, and the wife is the primary beneficiary. The charity is designated as the contingent beneficiary. The couple and their investment advisors allocate the cash values to the desired investments. The cost differential offered, because of the tax deferral between PPVA and other taxable investment strategies, contributes to a significant degree of tax-deferred compounding.

In this example, the benefits of creating a charitable legacy through a PPVA investment account are illustrated by comparing it to a taxable investment account. Assuming a 7% annual return, net of investment management fees, and 25% of the gains in the taxable investment account qualifying for long-term capital gains tax rates, the PPVA investment account delivers nearly twice as much value after 20 years. This is more than three times as much value after 40 years. By using a PPVA, the couple has multiplied their charitable bequest while maintaining access to the funds during retirement.

In the second example, a family uses the PPVA in a multiple generation, wealth accumulation strategy.

Families interested in accumulating wealth in multi-generational trusts such as a generation-skipping trust or dynasty trust may consider the use of a PPVA. Trusts are very efficient for wealth transfer tax purposes but often not for wealth accumulation purposes because of compressed income-tax brackets. If the client uses a multi-generational trust combined with a PPVA, they will achieve tax deferral on the investment income and still have access to sophisticated investment strategies such as hedge funds placed within the PPVA.

The trustee of the trust is the owner and beneficiary of the PPVA contract. The youngest members of the family are the annuitants named in the annuity contract. They have the potential of living the longest, providing a powerful tax-deferred compounding factor. The trustee might elect to use several young annuitants to guard against a tax burden in the event of a premature death of any of the annuitants.

While this is a brief overview of two PPVA investment strategies, the PPVA investment can be a compelling option for the wealthy client who wishes to maximize the tax deferral potential of his assets and participate in investments that are not available to the general public. The annuity is a powerful wealth accumulation technique for eventual retirement, charitable requests or future generations.

The Case for the Private Placement Variable AnnuityTa

xes

Earnings in a PPVA are tax-deferred.

Withdrawals are taxed as ordinary income rates, plus an additional 10% penalty if the withdrawal occurs before age 59 1/2.This form of annuity can accept tax-free exchanges from life insurance and annuity policies.If properly structured, a charitable beneficiary receives proceeds income and estate tax free.There are no capital gains if the annuity beneficiary is a private foundation or public charity.You will lose the opportunity to take income tax losses if the investments perform poorly.

Pric

ing The annual cost of the PPVA is about 65 basis points vs 100 to 350 basis

points for traditional annuities.There are no surrender charges.There are no additional sales charges or loads.

Othe

r

There are no K-1’s to file.There is creditor protection in some states.There is protection from insurance company credit risk.A person can change investment strategies within the structure of the annuity to adjust to the risk profile of the owner without the recognition of taxable gain.You must be an accredited investor and/or a qualified purchaser in order to purchase one of these products.The designation of the beneficiary is revocable and can be changed in the future.