IRS opts for various strategies for tax audits and the tax payers look for various ways for availing IRS relief. Private placement life insurance is one of these.
Here are various ways to avail IRS relief by employing private placement life insurance:
- Private placement life insurance provides compliant, tax-free compounded earnings – Private placement life insurance is a pre-emptive IRS audit tax strategy. It allows the tax payer to convert taxable ordinary income and capital gains into tax-free income. The current US Law does not expect the taxpayer to pay an income tax on this tax free income. For further details, the tax payer may also refer to IRS Private Letter Ruling 200244001 (May 2, 2002). Private placement life insurance may serve as a great way to IRS relief.
- Flexibility – The private placement insurance policy is quite flexible in nature. It allows the insurance companies to invest most of the premiums quite suitably. The investment may be kept legally separate. The client himself may choose an investment manager to manage the accounts. Or the insurance company may mange the accounts itself. There is no guarantee concerning the investment benefits. The profits vary and so do the death benefits. However, the benefit is not like to swing below a minimum. And that may provide considerable IRS relief.
- Income tax benefits – Private placement life insurance provides IRS relief by means of several income tax benefits including the growth of assets and the death benefits. There are assets with strong growth potential inside a life insurance policy. And compound incomes are kept tax free. Besides, the death benefits are also income tax free.
- International private placement life insurance policies – In contrast with the domestic policies, the international private placement life insurance policies allow a greater range of investments. These include hedge funds, derivatives, private equity, and real estate investment trusts, etc. The IRS relief may vary accordingly.
- Short term relief – The taxpayer may also avail of IRS relief concerning short term capital gains (Federal/California income tax). The income is exempt from the tax. Further, bond interest at the ordinary income rates Federal/California is exempt from creditor attachment. Besides, policies in certain jurisdiction e.g., Caymen Islands are exempt from creditor attachment.
- Minimize IRS audit risks – Minimizing IRS audit risks is another way to seek IRS relief as assets belonging to a qualifying life insurance policy are not subject to income tax. As far as the audits are concerned, life insurance has been granted “angel exception”. Further, policy lifetime withdrawls are also tax free. However, it should be remembered that the Modified Endowment Contract ("MEC") rules may or may not apply to all the policies.
However, it’s better to consult a tax attorney concerning private placement life insurance right in the start to avail maximum IRS relief in time rather than inviting a back tax debt later. If you file all the tax returns properly, IRS may not ask you to pay any of the taxes again that have already been paid by you.