Taxes, Cryptocurrency and Private Placement Life Insurance
Cryptocurrency is a trending topic and many wealthy individuals find it as a solution for investment gains. We will discuss in this article if Cryptocurrency can be used in conjunction with PPLI for tax savings and to obtain other financial benefits.
We, at EWP Financial, customize solutions using mainly Expanded Worldwide Planning, (EWP) and Private Placement Life Insurance (“PPLI”) to meet the complex needs of our clients.
PPLI is a versatile type of insurance policy used by super wealthy individuals, sometimes termed a unit-linked policy. The premium can be paid in cash or with a portfolio of bankable assets, but it is also possible to pay with non-traditional asset classes such as art, precious metals or cryptocurrency.
It’s worth noting that even where cryptocurrencies are considered bankable assets, the acceptance and valuation may be subject to certain conditions and requirements. Banks and lenders may have specific criteria, such as the type of cryptocurrency accepted, the liquidity and stability of the market, and the value of the cryptocurrency relative to the loan amount. EWP Financial can advise if you can use cryptocurrency as a bankable asset depending on your particular situation.
What is the role of PPLI?
It’s called Private Placement because each contract is issued under its own private placement memorandum – the policyholder’s assets are segregated from other policyholder’s assets under the same insurance carrier.
Whilst the legal ownership of the assets passes to the insurance carrier, the policyholder retains at all time full rights to request a partial or full surrender of the policy, and change the beneficiaries.
Why is it difficult to place crypto assets into custody? And why is structuring these assets into a PPLI an effective solution for this?
Cryptocurrencies are not financial assets but an asset class on its own. They also lack physical substance. Therefore, they meet the definition of an intangible asset and would be recorded at acquisition cost (i.e. price paid or consideration given).
Cryptocurrencies are designed to work as a decentralized medium of exchange, independent of a financial institution or any other central authority, so the custody is not with a traditional arrangement of a banking institution but held by a token or key with the key holder having secure access via private passwords or biometric authentication systems.
The difficulty for a cryptocurrency (and other digital assets) is that after the keyholder’s lifetime, if the assets have not been the subject of an inventory with regular updates, then it is very difficult for the executor to identify the deceased’s entire exposure to these digital assets.
Digital assets can be entrusted to professional trustees inter vivos, so that the problem linked to the devolution of the keyholder’s credential is solved. However, many trustees have difficulty custodising such assets due to the associated risks, directly or indirectly that they represent.
By using a PPLI policy to structure the digital assets and appoint the trustee as policyholder, these risks can be mitigated. In addition, the trust can also be the beneficiary of the policy to ensure estate planning over many generations.
What are the tax benefits of holding crypto within a PPLI?
Once the assets are placed within the PPLI, such assets enjoy growth free from income and capital gains tax (as long as there is no partial or full surrender), thus the policy benefits from the gross roll-up effect.
This is especially relevant for cryptocurrencies which are subject to high returns (and lows!). Unstructured cryptocurrencies could be subject to tax on an arising basis in countries like Australia, France, India, Singapore and USA.
“Once your assets are placed into a properly designed EWP Asset Structure, they are shielded from taxation, while simultaneously achieving maximum privacy and asset protection.” – Michael Malloy CLU TEP RFC
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