Treasury Proposes Curbs on Use of Life and Annuities in Wealth Planning

What You Need to Know

Greenbook provisions may never become law or take years to become law.
The new proposal could affect any variable life product that invests in assets purchased from the policyholder.
The IRS would tax distributions from the affected life and annuity products as ordinary income, with a 10% penalty.

The U.S. Treasury Department hopes to keep very wealthy individuals and families from using customized life insurance policies and annuities to cut their taxes.

The department has added a proposal to “Limit Tax Benefits for Private Placement Life Insurance and Similar Contracts” in its “Greenbook,’ or detailed discussion of revenue-raising proposals, for fiscal year 2025.

The proposal would limit the tax benefits for private placement life insurance policies, private placement annuities and some other types of variable life and variable annuity contracts.

What it means: Few Greenbook proposals become law. Even the Greenbook proposals that eventually become law may take decades to affect anyone’s taxes.

But the appearance of the private place life and annuity proposals in the Greenbook could affect the work of the financial services group lobbyists and advisors who help shape federal tax policy for years to come.

The backdrop: Treasury officials develop Greenbook reports every year as a supplement to the president’s annual budget proposals.

The administration of President Joe Biden released a proposed budget for fiscal year 2025 Monday. Federal fiscal year 2025 starts Oct. 1.

Greenbooks issued in the past have included proposals for limiting use of business-owned life insurance programs and use of life insurance-like arrangements that fail to meet the IRS life insurance policy requirements. The authors of the new Greenbook put the private placement life and annuity proposal after the description of the proposal for changing the rules for failed life contracts.

The new private placement life and annuity proposal could generate $140 million in extra revenue in fiscal year 2025 and $6.9 billion over the period from 2025 through 2034, according to an estimate in the 2025 budget.

Private placement life insurance and private placement annuities: PPLI and PPA arrangements are life and annuity products designed for customers who are paying so much that the program managers can customize the benefits, premium payment rules and investment portfolios.

In some cases, the customers can use stakes in companies they own to pay part or all of the premiums. In other cases, managers of the portfolio supporting a product might invest part of the portfolio in the product owner’s own company.

The proposal: Officials say in a discussion of the new private placement life and private placement annuity proposal that policyholders with a net worth of $20 million or more are using the arrangements mainly to generate tax benefits, not to provide mortality or longevity protection.