Future of Private Placement Life Insurance
The economic decline had many direct and clear consequences. However, what is not clear are the secondary and indirect effects some individuals will face as a consequence of the recent recession. One of the major and clear effects of the financial decline was the push towards reforming financial regulation. The reformation of the regulatory structure and procedure, undoubtedly, will alter the face of the financial system. It is unknown how these new financial regulations will affect individual investors as well as estate planners and their clients. This comment will specifically focus on the increase in regulatory requirements for private pools of capital or hedge funds and its effect on estate planners.
Hedge funds in modern financial markets are playing a significant role in the financial system. Significant growths in number, size, and capital under management have propelled private funds into becoming an integral part of the financial industry and overall economy. Historically, hedge funds-although required to submit to anti-fraud requirements-are a largely unregulated sector of the financial industry. The lack of oversight and the heavily publicized collapses of large private funds have resulted in a growing sentiment favoring an increase in the regulation of these funds. Broad regulation proposals for hedge funds-largely focused on registration and transparency-may have significant effects on individual investors, including individuals using these investment vehicles for estate planning purposes.
Estate planners use hedge funds or private funds as investment vehicles because of their history of earning significant returns. Wealthier estates can use interests in private funds in a number of different ways when planning for the transfer of their estate at death. When combined with insurance policies, trusts, and other estate planning instruments, individuals can minimize what would otherwise be significant income, gift, and estate taxes, while earning high returns on a large amount of capital. These strategies, however, are exclusively limited to higher net worth individuals, who largely use these strategies for tax avoidance purposes. Tax rules eroded these strategies, leaving the use of hedge funds in estate planning solely for estate planning objectives.
This comment will evaluate the possible effect that increased regulation on private funds and hedge funds will have on estate planning strategies for wealthier individuals, as well as the compatibility of increased regulatory standards and stringent tax requirements. The second section of this comment will outline a general estate planning strategy that uses a combination of life insurance and private funds interests as a medium to transfer wealth to future generations. This section will also include a description of the strict tax guidelines in these strategies. Part III will begin with a description of recently passed regulations and how these regulations will affect the private funds industry. The second portion of Part III will survey the regulatory proposals. The final section of this comment will evaluate the effect that increased regulations will have on estate planning strategies. Ultimately, this comment will conclude that, although there will be an elimination of the exemptions regularly used by private funds, an unclosed exemption will increase the number of private funds that cater to estate planners.