Partnering with Advisors to Enable Efficient Generational Wealth Transfer

[While the traditional use cases for life insurance and annuity products are widely distributed and generally tactical in nature, specialty life providers are strategically deploying insurance products like private placement life insurance (PPLI) and private placement variable annuities (PPVA). These insurance vehicles can be used in a variety of unique ways that support specific ultra-high-net-worth (UHNW) financial planning goals and needs.

To get a better understanding of the unique role private placement insurance vehicles can play in the financial planning process, particularly as it relates to transferring wealth to successive generations, we talked to Institute member Alan Jahde, Founder and CEO of Investors Preferred. The firm is a specialized insurance carrier offering bespoke private placement life and annuity products to support advisors who offer sophisticated financial planning and wealth preservation strategies to their clients. The firm is consistently ranked one of the fastest-growing U.S. life insurers by S&P Global Market Intelligence.

More advisors are coming to understand how private placement life insurance and private placement annuity products can provide solutions for specific financial planning requirements. This may be a particularly good time in the evolution of the financial services profession to re-examine specialized insurance tools for UHNW family wealth.]

Hortz: Generational wealth transfer planning is understandably a challenge for UHNW families and their advisors, given the three tax systems at play: income, estate/gift/transfer, and generation-skipping tax. How can private placement products help efficiently transfer wealth to successive generations?

Jahde: There’s a misconception in the wealth preservation planning arena that generational transfer planning and annuity products are like oil and water. It’s understandable how this misconception developed since traditional use cases for annuities are quite narrow.

But, the reality is that PPVAs can be used in a variety of unique ways that support specific planning goals. One of the use cases for PPVA we have been speaking to a lot of advisors about lately is the “stretch annuity,” which is specifically designed to support generational wealth transfer and minimize the impact of taxes across all three of the tax systems you just mentioned.

Hortz: What exactly is a “stretch annuity”?

Jahde: A “stretch annuity” is the name we use to refer to an expanded use of a PPVA.

When structured correctly, a private placement stretch annuity can optimize across all three U.S. tax systems – income, estate/gift/transfer, and generation-skipping transfer (GST) – to stretch tax deferral for multiple generations. Unlike most other annuities, in a stretch annuity structure, the premium payor does not have to be the owner, annuitant, or beneficiary.

Hortz: Can you provide a brief case study on applying a stretch annuity to illustrate the benefits for a UHNW family?

Jahde: Here’s a common scenario we see a stretch annuity being used for: The premium payor, or Generation 1, is the matriarch or patriarch of a UHNW family. Their child, or Generation 2, is the annuitant. And their grandchild, or Generation 3, is the beneficiary.

Here’s how that scenario could play out: Generation 1 buys a PPVA and then gifts the annuity outright or in trust to Generation 2. Annuity withdrawals from the stretch annuity are optional for Generation 2 until age 98, or upon Generation 2’s death. Therefore, all accumulated growth during Generation 2’s lifetime can be income tax-deferred. The Generation 3 beneficiary can elect to take payments over their expected lifetime.

The result is that income tax can be deferred and stretched over two generations.

I recently wrote a blog about this potential use case, which provides more details and visuals to help reinforce the model.

Hortz: What are the benefits of a multi-generational stretch annuity over traditional retirement planning?

Jahde: Retirement planning accounts are great for meeting retirement needs and achieving income tax-deferred growth during the lifetime of the account holder. However, they are a poor generational planning tool.

With traditional retirement accounts, any non-withdrawn account value is tax-deferred during Generation 1’s lifetime, but withdrawals by the account owner are subject to income taxes. Required minimum distributions also kick in at age 72. However, with a stretch annuity, Generation 1 has no required distributions, withdrawals are optional for Generation 2, and distributions can be spaced out across Generation 3’s expected lifetime. In short, there’s a lot more flexibility and the income tax implications can be well-planned for and spaced out.

Traditional retirement accounts are also subject to estate/gift/transfer taxes upon Generation 1’s death, and if Generation 1 makes Generation 3 their beneficiary GST would also apply. For the stretch annuity, however, growth that occurs after Generation 1’s transfer escapes both taxes.

Hortz: Can you provide some guidance or a recommendation on how advisors should be incorporating private placement products as niche strategies for their UHNW clients?

Jahde: Advisors don’t need to be subject matter experts when it comes to private placement products. As their partner, that’s our job. The advisor’s role is to recognize the potential benefits private placement products offer UHNW clients seeking low cost and tax-efficient solutions capable of shielding account earnings from taxation, then to include these solutions in their conversations with clients.

We invite advisors to our Insights page on our website and we are happy to have an introductory Zoom call with advisors and their clients so they can further learn and explore private placement concepts.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We operate as a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, FLX Networks, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).