Esmail: ETFs & Private Insurance

March 28, 2014

A huge prospecting opportunity is ripe for the taking, Main Management’s Hafeez Esmail says.

This is part of a regular series of thought-leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Hafeez Esmail, Main’s director of marketing.

ETFs continue to accumulate assets, and prove their worth, in an increasing number of areas of the financial landscape including retail investors, institutional investors and retirement plans and, as we’ll see, in the realm of private placement insurance.

All the while, traditional stock-picking approaches continue to lose ground among retail, high net worth and family office segments as ETF and ETF managed solutions make strides. Foundations, endowments and the qualified retirement space are seeing similar trends, albeit from a lower starting point.

Among the new arenas, private placement insurance may be the latest to recognize the merits of ETFs and ETF asset managers. It’s a concept that offers an appealing value proposition to the ultra-affluent, particularly given that U.S. tax rates are likely to continue to rise in the coming years.

Private placement insurance may be considered an institutional version of life insurance or annuity contracts for very wealthy families. To be clear, the market for private placement products, such as private placement variable annuities (PPVAs) and private placement universal variable life insurance (PPVUL) has definitely grown over the past 20 years.

When properly structured, PPVAs or PPVUL can offer income-tax deferral and asset protection for assets held through the separate accounts. Using these products could also mean the elimination of K-1 forms for alternative investments such as futures-based commodities and hedge funds.

A Few Broad Ideas

Keep in mind that ultra-affluent families often seek to create a legacy via charitable giving. One method of potentially enhancing those assets is with the use of a PPVA.

The benefits of using this wrapper can be compelling, and include the following:

  • Retention of ownership and asset control during donor’s lifetime
  • Deferral of all investment gains from current tax year
  • No capital gains if a private foundation or public charity is named as PPVA account beneficiary. This designation can be changed by the donor at any time.

To be more specific, the appealing aspects enumerated above mean high net worth families can have some attractive attributes versus traditional charitable legacy instruments. This includes advantages relative to private foundations, donor-advised funds, charitable lead trusts and charitable remainder trusts.



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