EP 41 TT Podcast Tax-Smart Strategies- Leveraging Life Insurance for Private Equity Success

Terrence Taylor:
Welcome to the Taylored Tax Show podcast. We are here to help highly paid, highly taxed, and high profile taxpayers save a bunch on your taxes legally. When you follow our podcast, you will know how to make sure that the more you make, the less they take. Folks, welcome back to the Taylored Tax Show. the podcast that helps highly paid, highly taxed, high profile, high net worth, and ultra high net worth taxpayers save a bunch on taxes legally and perennially. I'm Terrence Taylor, the co-founder of Taylored Tax. I'm an enrolled agent and an MBA, and this is my partner, Big Al Darnell Jr. Say what's up, Big Al.

Big Al Darnell Jr.: Big Al, I love my mama.

Terrence Taylor: Yes, sir. Big Al is also a co-founder of Taylored Tax and an enrolled agent and an MBA. Today's topic is the final installment in our 14-part series, folks, on life insurance. This one we're calling Tax Smart Strategies, Leveraging Life Insurance for Private Equity Success. And Big Al, when we were talking about this particular topic, We didn't realize how rich this topic is until we did a bit of probing. And now folks, we got so much insight and so much knowledge to share with you. So big guy, let's get right into it. Folks, we're gonna tell you a little bit about the benefits from a tax angle of using life insurance when you are a private equity investor. And then we're gonna give you some specific examples of ways to use life insurance. And then we're gonna conclude and just make sure we give folks a bit more insight into what they should do if they plan to follow the advice. The advice, the information, right? Because as you know, we're sharing this information with you and you should consult with a qualified tax professional if you want to use any of the advice we've given. We'll even tell you about some other specialists to consult with. But okay, Big Al, let's jump right in. So what are some of the key goals for high income and high net worth individuals is where we started with this. And there are a few of them. So one is tax deferral and minimization, reducing the impact of high income and capital gains taxes, especially in the private equity space. Wealth preservation. protecting assets from estate taxes, creditors, and market volatility. Wealth transfer, ensuring efficient passing of wealth to heirs or philanthropic causes, providing liquidity for estate taxes or business needs without forcing the sale of illiquid assets, especially like private equity investments. Last but not least, diversification, balancing the risk of private equity by using life insurance as a non-correlated asset class. So Big Al, Let me kick this over to you. How does life insurance integrate into private equity strategies?

Big Al Darnell Jr.: Well, when we're talking about private equity, by the way, great synopsis that you just did on how this benefits. So with private equity, that just means that you're using non-public funds in order to invest in non-public investments. And with private equity, using life insurance in private equity just means that you are the cash value in your life insurance to invest into using it as an alternative asset. What I mean by an alternative asset, it is not one of the traditional means or sources of funding for any investments. And in saying so, by using a policy like we've spoken about many times before, an IUL or a whole life policy, which produces a cash value benefit by what it does is it grows tax deferred and you can draw from it tax free as well. So long as you pull it out from a loan and you don't go, you don't create a MEC, a modified endowment contract. So these are what we call safe money to help complement some of the higher risks that you might have in other forms of investing in private equity.

Terrence Taylor: Cool. Well, Big Alec, let me jump in here, because I want to talk to folks about leveraging that cash value that you spoke about for private equity investments using these permanent life insurance policies, because these types of policies index universal life, whole life policies, allow high net worth individuals to build significant cash value over time, which can then be used and accessed tax-free via the policy loans like Big L spoke about, or even withdrawals as long as they're structured correctly. These funds can then be reinvested into private equity or other opportunities. And benefits include access and liquidity without triggering taxable events, which we love, Big Al, because we love saving folks taxes, right? Continuation of tax-deferred growth in the policy, even as cash is taken out. Preservation of the death benefit, as long as you manage the policy carefully enough to avoid the policy lapsing. So let's use an example, Big Al. Imagine a high-profile exec builds 5 million in cash value inside a life insurance policy. They then take a $2 million loan from the policy, tax-free, to invest in a private equity deal. The policy cash value continues to grow, and the private equity deal offers potential outsized returns. Meanwhile, the death benefit remains intact. That's the loan amount to support family or estate or other causes that this particular exec cares about. Hey, Big I, why don't you tell us a little bit about funding life insurance with private equity gains?

Big Al Darnell Jr.: Great, great. And here's the thing is that with private equity, a lot of times what we're referring to is a PE fund, a private equity fund. And the beautiful thing about a private equity fund, which we've talked about as well, is this thing called a carried interest provision. And the carried interest provision allows managers of a PE fund to have their gains taxed at the capital gains tax rates. So now, with that being said, let's just say that you have, because with these PE funds, it's not an investment where you're going to get what you call regular intervals of payments and returns on your investments. You might go years without getting a return, but then year number three or four, you have this huge windfall of like two million dollars or some odd number of odd amount of gains. So now what you could do is number one, in that scenario, we're going to have to use different tactics to try to lower that. However, since we're talking about using in a permanent life insurance, some form of permanent life insurance with your private equity gains, you can still use some of those gains to invest as a huge chunk to invest in a a permanent life insurance policy so that that can grow tax deferred. Because what happens is since these PE funds or PE gains aren't subject to or you can't use a 1031 exchange on them, you're probably going to invest them in something else that's going to grow and be taxed and then invest that in something else that's going to grow and be taxed. So why not invest it in something like permanent life insurance that's going to grow and not be taxed. So that's that one. So now another one that that Terrence knows a lot more than I about, if you could let us know about ILETS and what does the ILETS stand for and how can we use that for tax mitigation and PE funds?

Terrence Taylor: Sure, Big Al, and just to share as well, we use the word investments very interchangeably, folks, and we just want to put it out there that when you think about life insurance and the things that we're talking about, think of it from the three key reasons why you would want to use life insurance. To protect life, to preserve capital, and to provide a solid financial foundation, stable financial foundation. the types of things that we're suggesting you do think of them in those three lights. Okay, let's talk about the irrevocable life insurance trust and how this can be helpful for estate tax mitigation. Well, it almost feels like we talk so much about this, Big R, because it's just such a powerful, powerful tool and strategy. But for ultra high net worth individuals with estates above the federal estate tax exemption limit, which is now $13.99 million. Big R, I just got one question. Why didn't they just give that extra one so we can say $14 million?

Big Al Darnell Jr.: Pretty sure they used some goofy equation to make it work. Right.

Terrence Taylor: So $13.99 per individual. or for those who play the tax game at the highest level and are still in loving marriages. If you're married, filing jointly, then that's 13.99 times two folks, so 27.98 million per couple in 2025. life insurance can be used to actually offset the estate taxes. We've talked about this before. So when you place the policy inside an ILIT, irrevocable life insurance trust, the death benefit is removed from the taxable estate. The proceeds can then be used to pay the estate taxes or provide liquidity to preserve private equity investments. This is the part I like for private equity investors. Or other illiquid assets, because Big Al's already talked about the time horizon that private equity investments tend to require, right? Sometimes up to 10 years or more. So this ensures that heirs are not forced to sell PE holdings, often at a discount if you have to sell them during probate, to cover tax liabilities. This is huge, Big Al. And then another thing, since we're talking about the taxpayers who are ultra high net worth taxpayers, why don't you tell us a little bit about private placement life insurance for ultra high net worth individuals?

Big Al Darnell Jr.: Definitely. Yeah. So private placement life insurance is usually used, like Terrence said, for ultra high net worth individuals. Now when you think about it, you have to understand how life insurance works. The older you are, the more expensive it gets. The larger the benefit that you're trying to gain, then the more expensive it can get. So when we're talking about ultra high net worth individuals, people that are worth over $100 million, imagine trying to get life insurance on yourself and you're worth over $100 million. So you'll need over $100 million or a couple hundred million dollars worth of life insurance. So now in that scenario, those costs are going to be extremely high. All right. So now what private placement life insurance does a lot of times, because like a lot of things with ultra high net worth, the premiums can be a lot more negotiable than they would be in a traditional life insurance sense where you just get your mouth cotton swabbed and you turn it in and they give you an immediate assessment. So with this, it allows the policyholders to negotiate the premiums to an extent and then invest those premiums into these ultra high net worth activities like hedge funds, private equity funds, and other investments that don't have a lot of tax benefits. So by them being able to use this PPLI for these non-tax efficient investments, it really helps them out along the way. And a lot of people are using this with estate planning because you could get an immediate payout upon the policyholder's death. So yeah, that's private placement insurance. I would definitely encourage you to speak to a professional like Terrence about those. Now, finally, my good friend, could you tell us how life insurance can create liquidity for private equity exits? Yes.

Terrence Taylor: Yes, sir. Thank you for the opportunity. And folks, so we're coming to a close here. Private equity investments, as we know, are often illiquid, right? So long time. They have long-term horizons, seven to ten years before you can actually realize gains. What happens if the investor passes away during this period? Well, this is where that protection of life and preservation of capital and financial stability that only life insurance can provide comes into play, Big Al, right? Because during this period, the estate probably lacks liquidity to cover taxes or debts, but life insurance can provide immediate liquidity. The death benefit can be used to meet estate tax obligations. The heirs, again, as we said, don't have to sell the PE interest at a disadvantage. Another very exciting opportunity through life insurance and private equity is the bridge financing. The cash value of the permanent policy can serve as a source of liquidity during the PE funds lockup period as well. So Big Al, let me take us home and look. We focused on taxes, life insurance, private equity, so let's bring this home. Tax advantages of life insurance as we spoke about. Tax deferred growth. The cash value in permanent policies grows tax-deferred, helps to shelter high-net-worth individuals and their money from tax obligations on income or gains. Tax-free access, policy loans and withdrawals, when structured correctly, can be accessed tax-free, providing flexibility to fund additional P.E. investments or meet other liquidity needs. tax-free death benefit for estate planning. The death benefit bypasses income taxes. And if held in an islet, irrevocable life insurance trust, it also bypasses estate taxes too. And then reducing taxable estate. Premiums paid to life insurance policy in an islet reduce the taxable estate while still providing liquidity for estate taxes. But keep these points in mind, and big I'll mention them. Make sure you work with a qualified life insurance agent to structure your policy so you avoid the modified endowment contract or MEC status because a MEC would lose some of the tax advantages. For example, the loans now become taxable. Premiums and funding should be carefully structured so you avoid the designation of a MEC. We've already said work with experts, so you want to make sure you work with all the experts you need because life insurance and private equity strategies do involve complex tax and legal considerations. So make sure you have a good team of professionals you're working with, qualified tax professionals. We're more than happy to work with you as Taylored Tax. If you prefer to work with other qualified tax professionals, that's a must. Estate planning attorneys, financial planners, life insurance specialists, especially those who are familiar with high net worth strategies or tax strategies for high net worth individuals and life insurance strategies for high net worth individuals. Whatever you do, stay within those IRS guidelines, right? Make sure all the strategies comply with the rules, avoid unintended consequences, especially for the private placement life insurance or the irrevocable life insurance trust structures. So, folks, that's what we wanted to share with you today. Thank you for your time. Big Al, take us home. What are your closing thoughts?

Big Al Darnell Jr.: Well, my closing thoughts are, yeah, that was a quick masterclass into how life insurance and private equity could be interfused for the best tax advantages for not just currently, but your estate planning needs. Also, make sure to check out Tax Strategies GPT on the OpenAI Yeah, open AI platform. And then also, if you want to reach out to Terrence, you can reach him at terrence at taylortax.terence at T-A-Y. L-O-R-E-D-T-A-X dot A-I, and then Big Al at the same, TaylorTax dot A-I. Other than that, we're super happy to see you again. Can't wait for the next podcast about a completely new topic outside of life insurance. And if you got any questions, make sure to write them in the comments or reach out to us. So other than that, you all have a good one, and cheers. Thanks, folks. See you soon. make sure that you follow us and subscribe on YouTube and any other platform that good podcasts show up on.