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placement VUL with lower expenses than other VUL policies in variable policies and opaque when investments are man-
as well as a broader array of tax-inefficient investments. aged in-house by the insurance company.
Life insurance costs traditionally include large upfront com- Expenses often are lumped in with mortality costs in a
missions, but private placement VUL substitutes a small trail category known as “cost of insurance,” or COI. Steve Parrish,
commission for the agent who manages the policy and offers adjunct professor of advanced planning at The American
investment advisors the ability to apply an investment fee on College of Financial Services, says: “Mortality costs are the great
assets held within the policy. mystery with life insurance. First, COIs on universal life prod-
“Due to the lower-cost nature of private placement con- ucts are not mortality. They are a mishmash of mortality and
tracts, they have larger cash values, especially near the incep- expenses. So don’t look to COIs to tell you much of anything.”
tion of the contract,” DPL’s Rembowski notes. Further, private placement life insurance may not provide
Another advantage of products developed for the high-net- the lowest level of insurance, according to Rembowski. “A lot of
worth market is the reduction in mortality expenses. Higher- times COIs on private placement products are higher because
income Americans, on average, live longer. private placement companies are using reinsurers instead
According to Rebello, private placement life insurance is of holding the insurance themselves. The primary reason to
appropriate for clients who have at least $1 million to $2 mil- choose private placement is the investment choices. You have
lion to commit to premium payments over four years and have access to private alts and hedge funds — the ugliest of the tax
more than $5 million in investable assets. stuff. However, standard VUL products will have a list of ’40
The products also provide estate tax benefits, so in addition Act Funds as well as a lower level of insurance. Advisors can
to higher after-tax growth, life insurance can provide estate select a portfolio of assets that work well within the product.”
tax alpha — particularly in states that impose their own estate
tax. Rebello notes that private placement VUL also can offer General Account Portfolio
“significant improvements over existing grantor trust strate- Life insurance companies invest premiums in a general
gies that ultra-high net worth clients use for estate reasons.” account whose performance historically follows yields on
An important difference between life insurance and invest- intermediate-term corporate bonds that represent the bulk of
ments is expense disclosure. The cost of a death benefit is a their holdings. In fact, the Federal Reserve estimates that life
function of mortality expectations, investment performance insurers hold 6% of credit market instruments in the United
and fees. Mortality costs can be lower for UHNW clients in States. Life insurance products such as whole life and uni-
products developed for this audience, such as private place- versal life accumulate cash value over time that reflects the
ment and business-owned policies. Investment fees are clear performance of the insurer’s general account.

If you want to fund the SLAT with something like real can limit them to be used for specific purposes, such as medical
4 estate or a closely held business, you, the grantor, still care, or create a schedule when the distributions may be made.
can retain control of that entity. You can also set up the trust to
limit the ability of the beneficiaries to control whatever entities Any assets held jointly with your spouse must be sepa-
are placed in the trust. 8 rated well before they are put into the SLAT. Without a
sufficient interval of time, The IRS may decide that the assets
Assets gifted to a SLAT do not receive a step-up in income still technically belonged to your spouse, who may end up being
5 tax basis at the grantor’s death since they are not included responsible for taxes on the transfer.
in your taxable estate. Instead, they retain the grantor’s carryover
basis. This can incur sizable capital gains taxes if and when the As the grantor of the trust, you are responsible for
beneficiaries choose to sell any appreciated assets from the trust. 9 income taxes incurred on any appreciating assets held
in the SLAT. But because you have no rights to the assets in
If you’re concerned about protecting the assets in the the trust, you cannot use those earnings to pay the taxes. That
6 trust, an incomplete gift SLAT may make sense. If you money will have to come from somewhere else.
get sued or divorced after setting up the trust, the incomplete
gift SLAT protects the assets. One downside, though, is that For 2022, you can give a total of $12.06 million free of
because the gift is incomplete, the assets don’t get moved out 10 federal gift tax, but this is scheduled to revert back to $5
of your estate for tax purposes. million per person (adjusted for inflation) at the end of 2025.
So if the assets you are considering funding the trust with are
You, the grantor, have a lot of authority and flexibility with significantly higher than $5 million, you may want to consider
7 earmarking any spousal distributions from the trust. You moving on this strategy in the next few years. —Tom Nawrocki

APRIL/MAY 2022 INVESTMENT ADVISOR 23