Holding Crypto within Private Placement Life Insurance
Caroline Bennett-Akkaya (TEP) is a Partner at 1291 Group, a leading advisor for private wealth solutions using life insurance at the core of the planning.
1291 Group was founded by Marc-André Sola in 2000 and it has grown organically, now operating from 14 locations worldwide and 80 staff globally. Being an independent adviser means the Group has access to 51 insurance carriers in 15 jurisdictions. It is licensed in 36 countries to provide advice and support on life insurance solutions.
Within the 1291 family, clients are connected to a group of top international professionals with backgrounds in law, tax, insurance and trusts.
Caroline is based in the Geneva office of 1291 Group. She has over 25 years of experience in the trust and estate planning sector and brings this expertise to help families achieve their goals.
What are the needs of the families you serve and how does Private Placement Life Insurance achieve that?
Over the years we have realised that the needs of families are generally:
Privacy and Confidentiality
Estate and legacy planning
Cash and liquidity access
We call this “PATEC”
Private Placement Life Insurance is a unit-linked single premium payment insurance 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 crypto.
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, change the beneficiaries and to appoint their own investment manager.
Why is custodising crypto assets generally difficult? 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 decentralised 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 customising 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.
Are there risks involved in holding crypto in PPLI? If so what are they and how can these risks be mitigated?
Holding cryptocurrencies in a PPLI entails no risks that holding them directly would not also entail. However, investing in cryptocurrencies directly can be vulnerable to fraud; by holding them through a PPLI structure, the insurance company will handle the custody of the underlying assets.
Switzerland is also a leader for cryptocurrencies and there are already pure play crypto banks duly authorised by our regulator FINMA and even more traditional banks are expanding their offering for crypto assets. Custodising digital assets of a policy with a duly regulated Swiss bank as custodian will further mitigate the typical risks such assets entail as it is the bank’s obligation to ensure a state-of-the-art due diligence and safe custody of them.
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.
Does PPLI offer liquidity for clients?
By funding a PPLI, a client with crypto assets will have access to a private account which would function as an “off-ramp” conversion to fiat (legal tender whose value is linked to a government-issued currency like the US dollar).
The client can then request a partial surrender for liquidity needs (which might trigger taxation depending on the tax residence of the client).
Do you see more people choosing to hold crypto within PPLI in the coming years, if so, why?
Yes indeed, more and more people are looking to hold their assets in a safe and secure way. As the legal ownership of the policy is with the duly regulated insurance company, for high-profile clients looking to secure their assets from claims, if a policy is set up correctly (taking care to observe the absence of fraudulent conveyancing) then the assets within the policy are out of reach of a client’s creditors.
With clients already leading global lifestyles and with relocations becoming easier again, one of the major advantages of a PPLI is the portability, which allows clients to keep their policy (making sure to comply with local requirements for policies), thus avoiding the need to surrender the policy and triggering a taxable event.
As cryptocurrencies will come under stronger legal, regulatory and tax scrutiny, cryptocurrency investors will be confronted with potentially higher legal and tax challenges in order to keep the portfolio in a compliant way, while benefiting from asset protection and tax deferral. Holding these assets in PPLI structures will help to mitigate those risks.