• The richest of the rich can use life insurance to avoid estate and income taxes.
• Private-placement life insurance is perfectly legal — unless a new bill passes.
• A financial advisor tells Insider how the insurance saves the wealthy tens of millions of dollars.

Life insurance is probably the least sexy area of financial planning. But for the richest of the rich, policies can slash tens of millions of dollars off their tax bills.

Private-placement life insurance is a little-known tax-avoidance tactic. When structured correctly, PPLI policies can be used to pass on assets from stocks to yachts to heirs without incurring an estate tax.

"In the US, people sell life insurance as a middle-class way of structuring assets," Michael Malloy, a wealth advisor who has specialized in PPLI for 20 years, told Business Insider in 2022. "But PPLI is a completely different animal."

The PPLI industry enables a few thousand ultra-rich American taxpayers to shelter at least $40 billion, according to an investigation by the Senate Finance Committee. The report estimated that the average PPLI policyholder is worth well over $100 million.

PPLI is legal—for now. On December 16, Oregon Sen. Ron Wyden released a draft bill to close the loophole. Under the Protecting Proper Life Insurance from Abuse Act, PPLI policies would be treated as investment funds, not life insurance or annuity policies, which would eliminate the tax benefits.

"Life insurance is an essential source of financial security for tens of millions of middle-class families in America, so we cannot have a bunch of ultra-rich tax dodgers abusing its special tax treatment to set up tax-free hedge funds and shelter oodles of cash," Wyden said in a written statement.

While tax savings are the primary draw of PPLI for US clients, those in the Middle East or Latin America are often looking to use trusts to conceal information about specific assets from corrupt governments, Malloy said.

"Clients don't want an organized crime ring bribing an underpaid tax official to get information on their family," he said.

US taxpayers are required to report to the IRS only the cash value of a foreign life-insurance policy, not the assets within the trust.

These offshore life insurers in jurisdictions such as the Cayman Islands and Bermuda typically require at least $5 million as the upfront premium. Malloy advises that clients have at least $10 million in assets to make PPLI worthwhile. His clients usually hold at least $50 million in assets.

Here is how PPLI works

In short, an attorney sets up a trust for a wealthy client. The trust owns the life-insurance policy that's created offshore.

The PPLI policy premiums are funded with assets. The assets must be diversified — typically with at least five different asset classes — and can include stocks and business interests, as well as tangible assets like yachts and real estate.

Depending on the client's age, nationality, and other factors, the death benefit can, in theory, max out at $100 million, Malloy said.

If structured correctly, the benefit and the assets in the policy are passed to the children without incurring an estate tax. A 40% federal estate tax applies to estate values topping $13.61 million for individuals and $27.22 million for married couples.

Unlike with policies from US insurers, clients can cancel their policies without paying a massive surrender fee. The assets also grow within the trust tax-free. The cash value of the PPLI policy assets is held in a separate account, and this cash can be disbursed to the policy holder or invested. Investing in hedge funds is a popular use of PPLI assets.

But there's a catch. Policyholders have limited control over investment decisions. They cannot give directives to the asset manager to buy a certain number of shares in Apple, for instance.

It also requires a small army of professionals, including trust and estate attorneys, asset managers, custodians, and tax advisors. Since PPLI is relevant only to the ultrawealthy, few in wealth management or law are familiar with it.

"There's no questions on the CPA exam or the bar exam about PPLI, and asset managers are kind of skeptical," he said. "They think you're going to take assets away. Actually, the assets become stickier and get more alpha because the client pays less tax."

How the proposed bill would endanger PPLI

Under Wyden's proposed legislation, most PPLI policies would be classified as "private placement contracts" (PPCs) rather than life insurance policies. As such, any accumulated earnings and death benefits would be taxed.

The bill would apply to future and existing PPLI policies, giving policyholders 180 days to liquify the assets or transfer them. Insurers who dare to issue or reinsure the policies will no longer have the benefit of secrecy. To better enable the IRS to enforce the bill, insurers will have to report all PPCs or face a $1 million fine for each 30-day period that they fail to do so.

The bill faces steep odds of passing with Donald Trump's reelection and a Republican House and Senate. The insurance industry is counting on it.

"This legislation is an attack on all forms of permanent life insurance and, by extension, an attack on holistic financial planning," said Marc Cadin, CEO of trade group Finseca, in a statement. "We look forward to working with the new Congress and the Trump administration to advance policies to move our country forward rather than raising taxes on life insurance."

• Investment tactics often require big buy-ins and high fees.
• New tech is lowering the price of entry in fields like direct indexing and private markets.
• This article is part of "Transforming Business," a series on the must-know leaders and trends impacting industries.

Investing like a billionaire comes with a high price tag. But thanks to technology, the barriers to these elite opportunities are starting to crumble.

Consider direct indexing, a strategy favored by the rich to lower taxes by selling underperforming stocks and using the losses to offset other gains. These personalized portfolios used to be out of reach of the merely affluent, requiring steep account minimums. Over the past five years, direct indexing has exploded as technological advancements have made it worthwhile for wealth managers to offer the services to Main Street customers. The account minimum for Fidelity's FidFolios, for example, is only $5,000.

"Direct indexing has become accessible at a different level of wealth than it has been in the past," said Ranjit Kapila, the copresident and chief operating officer of Parametric. "That wouldn't have been available or possible without the technology trends we've had to be able to do this level of computation at scale in a cost-efficient manner."

Parametric, the pioneer of direct indexing, is also moving downstream. By adopting fractional-share investing, Parametric lowered the minimum for its core product to $100,000 from $250,000. The firm plans to offer a direct-indexing product with fewer customization features for $25,000 in 2025.

Private markets face steeper hurdles. This opaque field was traditionally reserved for deep-pocketed investors like pension funds and ultrarich individuals. But now investors have more access to financial results for funds and privately held companies as data providers race to meet their needs. Machine learning and AI have made it easier for these firms to extract and analyze data.

BlackRock views this data as the great equalizer and has grand ambitions of indexing these opaque private markets. The asset-management giant agreed this summer to acquire the data powerhouse Preqin for $3.2 billion.

"We anticipate indexes and data will be important to future drivers of the democratization of all alternatives," BlackRock CEO Larry Fink said on a conference call. "And this acquisition is the unlock."

Leon Sinclair, Preqin's executive vice president, argued that with the number of public companies dwindling, it's imperative for mass-affluent investors to get better access to private markets.

"Clearly there's more, deeper, better sources of funding for private companies that could stay private for longer," Sinclair said. "I think it's fair that the mass affluent can — in the right way — be brought along on that journey to get exposure to that part of the mosaic earlier."

Investing in automation for a competitive edge

Kapila described these technological developments as part of a trend in wealth management to capture customers before they make it big.

"There's a desire by financial advisors to try and engage investors earlier in their wealth-accumulation cycle," Kapila said.

Parametric, acquired by Morgan Stanley in 2021, operates in a competitive arena. Thanks to a wave of similar acquisitions, Parametric faces well-capitalized rivals such as BlackRock's Aperio and Franklin Templeton's Canvas. Industry stalwarts like Fidelity and upstarts like Envestnet also want a piece of the action.

Kapila said the need to compete on scale and fees required Parametric's technology to be as efficient as possible.

"It'll be harder," he said. "We have to do many, many more accounts to really drive growth in assets, etc. But those challenges are exciting to me as a technologist."

To meet that need, Kapila is pushing Parametric to develop more automated products, such as Radius, which launched this year. Radius constructs equity and fixed-income portfolios and runs simulations to identify the best selections for portfolio managers. He plans to launch more cloud-native tools, which are easier to scale and manage, for other asset classes in 2025 and 2026. Parametric is also piloting generative-AI tools to onboard accounts more efficiently.

Clients' expectations are also rising. There's demand for Parametric's tax benefits but with actively managed strategies rather than indexes, he said, spurring partnerships with asset managers.

Parametric recently launched an offering that allows customers to pick equities off strategies from the financial-advisory and asset-management firm Lazard.

To stay ahead of the curve, Preqin is developing more sophisticated products. Last year, the UK firm launched an Actionability Signal that uses machine learning to identify private companies likely to be open for investment.

"The sole focus on public information for certain tasks around valuation and risk management are not really going to be the way that people do this," Sinclair said. "We're moving much more to a world where real proprietary private information at the asset level, which is transactionally oriented, is available to people."

In June, his division launched a data tool that analyzes $4.8 trillion worth of deals across 6,500 funds. This database can be used in a slew of ways, from backing up valuations in negotiations to identifying which financial factors, such as revenue growth or debt paydown, contributed the most value to a successful deal.

With the rise of generative AI, Sinclair expects that users will be able to interpret data with more ease using natural language commands.

"I think you'll see that be more prominent across the industry where people expect to interact with large data sets in really natural common ways," he said. "We think all that will probably start to be visible over the coming years."

Tech is the first step to narrowing education gaps

On average, retail investors allocate just 5% of their portfolios to alternative investments. If BlackRock successfully indexes private markets, it could go a long way toward boosting that percentage.

However, Sinclair said more work is required to help mass affluent investors feel comfortable investing in private markets. As someone who grew up working class and was only introduced to finance in college, he knows there is an education gap to overcome.

"To get Joe Bloggs very excited and comfortable with committing capital, they need to be able to understand what the different basis of those returns are," Sinclair said.

He added: "I think it's in the industry's interest to enable those new sources of capital, to bridge the gap in understanding, to bridge the gap in analytics, to bridge the gap in frequency of reporting, to make that an easier journey for people to go on."

• Rich Americans want their mansions to stay in the family without causing sibling strife.
• They can use trusts to dictate how their heirs can use the family home and who pays for what.
• These wealthy homeowners can save on estate taxes at the same time.

In a survey conducted by Ameriprise in 2022, nearly seven out of 10 respondents said they planned to leave real estate to their heirs, but more than half of them said they hadn't told their heirs about it.

Even among rich heirs, passing on real estate without proper planning can lead to sibling strife. Who gets the Hamptons house for July 4? What if one sibling wants to renovate the Aspen chalet and the others don't want to split the cost?

"You have to start by recognizing that the family home or the vacation home is more than a financial asset. It is deeply personal," Adam Ludman, the head of tax advisory at JPMorgan Private Bank, told Business Insider.

Instead of leaving thorny questions up to the kids, parents can control how the property will be managed after they die. They can gift the home using a trust that includes enough cash to maintain it. (If done before death, this can save on taxes, too, Ludman said.) Their chosen trustee looks after the property's finances and, if the parents wish, has the power to sell or transfer the home under certain conditions.

Parents can also use operating agreements to allocate holidays to each sibling and control whether the home can be used for family weddings. They can even stipulate which types of property damage the trust will pay to fix if a family member is responsible. Operating agreements can go into exacting detail, but Ludman said it's important to leave some control up to the heirs.

"They can be granular, but they also need enough flexibility so the operation of the home is not overly restricted," he said. "Families obviously evolve and expand, and circumstances can change."

When equal isn't equitable

Parents often assume their adult children will share the property equally after they pass, Ludman said. But they should talk to their children — and possibly their partners — to assess their preferences.

"Does each of them have the same attachment to the home?" he said. "Will they continue to use it with the same regularity? Will they be able to share equally in the expenses of the home?"

He added that one of the most common dilemmas is having children with different incomes. Perhaps two of three adult heirs are wealthier than the third, who doesn't want to share the burden of property tax and other costs. The parents can account for this by putting funds in the trusts to cover their costs. Alternatively, they can put a buyout provision in the operating agreement that dictates how the two siblings can acquire the third's stake.

While Ludman encourages allowing the heirs some control, it's important to have a decision-maker in case the siblings reach a stalemate. The trustee can make the final call on issues like repairs, renovations, or even whether to sell the property.

Some parents prefer to give their children more power. Rather than using operating agreements, they can write a "letter of wishes," Ludman said. This document is not legally binding but indicates how the parents would like the property to be used.

He described this as an important time for transferring homes and other assets. Married couples can give away $27.22 million in assets without incurring the 40% federal estate tax. That exemption is due to expire at the end of 2025, but it looks likely that it will be extended given the Republican Party's control of Washington.

Thanks to tax cuts made during the first Trump administration, Americans can give or hand down about $13 million in assets without paying federal estate tax. Only 0.2% of taxpayers have to worry about this tax, and they hire top-notch accountants and lawyers to pay as little as possible.

"This is a wealthy person's playground problem," Robert Strauss, partner at the law firm Weinstock Manion, told Business Insider.

Some of these tax avoidance techniques might be eyebrow-raising, yet they are perfectly legal. For instance, taxpayers can put homes and country homes in trusts that last decades and any appreciation in the property's value doesn't count toward their taxable estate. Life insurance, probably the least sexy area of financial planning, can be used to save tens of millions of dollars in taxes if bought from issuers in the Cayman Islands and Bermuda.

Currently, individuals and married couples can gift or bequeath $13.61 million and $27.22 million, respectively, before a 40% federal estate tax kicks in. That exemption is due to expire at the end of 2025, but it looks likely that it will be extended given the Republican Party's total control of Washington.

Here are 12 little-known techniques that the richest taxpayers use to pay less to Uncle Sam:

Using trusts to give away homes and country houses

Qualified personal residence trusts, better known as "QPRTs," effectively freeze the value of a real estate property for tax purposes. The homeowner puts the primary residence or vacation home in the trust and retains ownership for however many years they choose. When the trust ends, the property is transferred out of the taxable estate. The estate only has to pay gift tax on the value of the property when the trust was formed even if the home has appreciated by millions in value.

QPRTs have become more popular in the past year as interest rate hikes confer another tax benefit. It seems too good to be true, but there are a few strings attached.

Passing wealth to future generations with trusts that last up to 1,000 years

From the Wrigley family behind the titular chewing gum brand to Jeff Bezos' mother, an Amazon investor, some of America's wealthiest use generation-skipping trusts to avoid paying wealth transfer taxes and provide for future heirs.

These so-called dynasty trusts allow taxpayers to pass along wealth to generations that haven't even been born yet and only be subject to the 40% generation-skipping tax once. Many states have eased trust limits to get the business of the wealthy, with Florida and Wyoming allowing dynasty trusts to last as long as 1,000 years, which spans about 40 generations.

The heirs don't own the trust assets but rather have lifetime rights to the trust's income and real estate. These trusts even protect assets from future creditors and shield them in the event of a divorce.

Giving to charity via trusts that also yield income

Charitable remainder trusts (CRTs) allow moneyed Americans to have their cake and eat it too.

Plenty of affluent taxpayers deduct charitable donations from their taxable income, but the ultra-rich can parlay their philanthropy into guaranteed income for life.

Taxpayers put assets in the trust, collect annual payments for as long as they live, and get a partial tax break. Only 10% of what remains in the CRT has to go to a designated charity to pass muster with the IRS.

These trusts can be funded with a wide range of assets, from yachts to property to closely held businesses, making them particularly useful for entrepreneurs looking to cash out and do good.

Holding life insurance policies via trusts to save on taxes and protect heirs from lawsuits

Rich founders with illiquid assets can take out life insurance policies to cover their estate taxes. They get the most bang for their buck if they put the life insurance policy inside a trust rather than owning it directly. The irrevocable life insurance trust (ILIT) collects the death benefit, pays the tax bill, and distributes whatever is left according to the insured individual's wishes. Any payout is also protected from estate taxes, even if the insured's estate and death benefit exceed the exemption.

There are other perks. If the insured wants to make sure that their heirs are protected from creditors or divorcing spouses, they can use ILITs to be doubly safe. While the law varies by state, trusts and life insurance both have strong legal protections.

Using charitable trusts that give the remainder to heirs

Also known as the Jackie O trust since it was used by the late First Lady, a charitable lead trust or CLT makes annual payments to a charity or multiple. Whatever is left when the trust expires goes to a remainder beneficiary picked by the grantor, typically their children.

If the assets within the trusts appreciate faster than an interest rate set by the IRS at the time of funding, the beneficiary can even end up with a bigger inheritance. CLTs can also be used to discreetly transfer wealth while being publicly philanthropic.

"I've seen lawyers use these to plan for mistresses, to plan for children that perhaps the spouse doesn't know about," lawyer Edward Renn told Business Insider.

Taking loans to pay estate taxes

Unlike QPRTs and CRTs, this technique is highly scrutinized by the IRS and comes with a lot of hoops to jump through.

Families that are asset-rich but cash-poor and facing an estate tax bill can either rush to sell those assets to make the nine-month deadline or take a loan.

The estate can make an upfront deduction on the interest of these Graegin loans, named after a 1988 Tax Court case. Further, if illiquid assets make up at least 35% of the estate's value, families can defer estate tax for as long as 14 years, paying in installments with interest, and effectively taking a loan from the government.

Graegin loans are prime targets for auditors and have led to years-long legal battles, but the savings can be worth it for rich families.

Buying offshore life insurance policies

Private-placement life insurance, or PPLI, can be used to pass on assets from stocks to yachts to heirs without incurring any estate tax.

In short, an attorney sets up a trust for a wealthy client. The trust owns the life-insurance policy that's created offshore. The assets in the trust are treated as premiums, and if structured correctly, the benefit and assets in the policy are bequeathed free of estate tax.

It's only relevant to the ultra-wealthy, often requiring $5 million in upfront premiums as well as a small army of professionals to set up and administer, including trust and estate attorneys, asset managers, custodians, and tax advisors.

Transferring depressed assets during a market slump

The down market has one silver lining for high-net-worth individuals. It is an optimal time to create new trusts as people can transfer depressed assets, whether they are stocks or bitcoin, at a lower tax basis.

The long-favored grantor-retained annuity trusts (GRATs) can confer big tax savings during recessions. These trusts pay a fixed annuity during the trust term, which is usually two years, and any appreciation of the assets' value is not subject to estate tax.

GRATs have picked up in popularity in the past year as the Federal Reserve has raised interest rates, which eat into the returns on these trusts.

Stashing assets in trusts for a spouse

The wealthy can save on taxes by putting their riches in trusts before the Trump tax cuts expire, but some don't feel ready to give their fortunes to their kids yet.

Luckily, there is a compromise. Using a spousal lifetime-access trust, also known as a "SLAT," married taxpayers can stash their fortunes in trusts that pay distributions to their spouses rather than giving assets to their kids. The beneficiary spouse can use this cash flow to fund the couple's lifestyle. After this spouse dies, the trust passes to new beneficiaries, typically the couple's children.

Buyer beware: divorce can mean losing those dollars forever. But millions in potential tax savings can be worth the gamble.

Using trusts that pay cash to spouses but keep the assets for the kids

When the wealthy remarry, they often have to balance the needs of their new spouse and their kids from a prior marriage. Trusts can be used to take care of the spouses, but the adult kids want their piece of the pie.

There is a way to make everyone happy. With a qualified terminable interest property trust, also known as a "QTIP," married taxpayers can put their fortunes in trusts that pay distributions such as stock dividends to their spouses. The income-producing assets, however, are untouched, and when the beneficiary spouse dies, everything in the trust is transferred to new beneficiaries, who are typically the adult children of the spouse who funds the trust.

The main benefit of QTIPs is peace of mind. If the beneficiary spouse remarries, they still get the cash, but they can't gift the assets to their new partner.

Transferring business assets to family-limited partnerships at big discounts

Sam Walton, the founder of Walmart, used a family limited partnership or "FLP" to save his kids and wife from paying any estate taxes on multibillion-dollar family fortune.

With an FLP, an individual — often a parent or two parents — pools their business assets, commonly real estate or stocks. As a general partner, the original individual can name their children as limited partners and give them interest in the partnership. The kids get cash distributions from revenue generated by the trust but do not have control over the actual assets. This control is appealing to parents who want to hold the purse strings.

Another sweetener: You can claim a discount on the assets transferred to the FLP and use even less of your estate-tax exemption. Though the IRS scrutinizes these discounts, they can be worth the gamble. The right lawyer can justify a discount of 45% or higher for less liquid assets, such as privately held businesses.

Giving stock to parents and inheriting it back when they die

Wealthy founders who built their businesses from the ground up face hefty capital gains taxes when they cash out. Instead of selling the shares outright, they can save on taxes by gifting their stock to their parents and waiting to sell the stock until they inherit it after their parents' death. These "upstream transfers" take advantage of a tax loophole for inherited assets that boosts the cost basis to its fair market value at the time of inheritance.

This tactic can also be used to save on estate taxes by ultra-rich entrepreneurs who have already used their exemption but have less-wealthy parents who haven't. They can stash the assets in a trust that benefits their parents until their passing and then their children. When the children inherit the assets, the federal estate tax doesn't kick in as long as the grandparents' estate does not exceed $27.22 million.

Lawyers warn that upstream planning comes with risks. Individuals can lose their assets for good if their parents decide to share the wealth with a new spouse or other children.