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Your support of a community organization is not just an act of generosity but can also be part of your overall planning.
Among the innovative strategies at the intersection of philanthropy and estate planning is the use of private placement variable annuities (PPVA) to make charitable contributions. A PPVA’s structure and features provide flexibility in planning, but also allow the donor or trustee, if trust owned, the freedom to make changes.
C3 Financial Partners has a specialization in providing education on insurance solutions designed to meet personal and philanthropic community goals.
Clarity: Understanding PPVA
A PPVA is the use of an annuity that is limited to and structured by an accredited investor and/or qualified purchaser to apply the tax and planning benefits of an annuity to one or more single investments or to a portfolio.1 PPVA recharacterizes a highly-taxed investment as an annuity so that the investment can grow tax-deferred within an annuity structure until it is accessed as annuity income in the future.
PPVAs share many of the same attributes, and are covered by much of the same legislation and regulations as, private placement life insurance (PPLI). However, they do differ in structure and in some applications. For example, unlike life insurance (including PPLI), annuities do not encounter issues with finite coverage amounts based on the total insurability of an individual. This means there are no contribution limits with a PPVA.
A PPVA differs from a traditional annuity in much the same way a PPLI policy differs from traditional life insurance. The insurer is responsible for arranging the annuity structure, leaving the choice of investment manager and custodian to the policyholder. The investment manager then instructs the insurance company on what underlying investments to make for the annuity.
These investments can be in the form of a managed separate account and/or insurance dedicated funds – funds constructed specifically for investment by life insurance policies and life insurance companies. Each PPVA must meet IRS rules for diversification of investments2 and policyowners, annuitants and beneficiaries must adhere to the prohibition against investor control.3
The planning specialists at C3 Financial Partners can answer your questions about ways you can support your community and work with you and your other advisors in evaluating if a PPVA is a fit for your goals and objectives.
Confidence: Integrating PPVA with Supporting Your Community
By using existing funds earmarked for community giving to purchase a PPVA where a charity is the beneficiary, several benefits may be realized:
- Tax Efficiency: The primary allure of PPVAs in community giving lies in their tax efficiency. The tax-deferred growth means that investments within a PPVA aren’t subject to taxes while inside the annuity and are tax-free to the tax-exempt community organization when withdrawn. This can significantly enhance the value of the funds available for community organizations over time.
- Investment Flexibility: PPVAs stand out for allowing donors to select their preferred investment manager, subject to acceptance by the insurance company. This means that donors can align their investment strategies with their risk tolerance and philanthropic timelines, ensuring that their charitable funds are managed according to their preferences. Also, a donor’s existing manager does not have to worry about the loss of money under management in the form of premiums as is the case with retail annuities.
- Customized Custodianship: The ability to choose a custodian with whom the donor is comfortable adds a layer of personalization and security in form of a legally separate account4, which helps the PPVA align with the donor’s overall financial strategy.
As with most charitable giving, using a PPVA to support community organizations may result in several tax benefits including estate and income tax reduction, as well as avoidance of capital gains taxation.
Most PPVAs earmarked for community organizations are owned by irrevocable trusts. This allows the PPVA to be outside of the donor’s estate while providing flexibility to the trust to change the beneficiary. This prevents potential adverse tax consequences that might otherwise arise if a donor revoked a charitable gift.
Coordination: Rely Upon Your Team
Deciding to incorporate a PPVA into a charitable giving strategy should only occur after checking these three areas off your list:
- Professional Guidance: Given their complexity, implementing PPVAs in charitable giving should involve engaging financial professionals, including the experienced life insurance team at C3 Financial Partners. C3 Financial Partners is uniquely positioned to help provide education on the topic but does not participate in the sale of a PPVA. Prior to purchasing a PPVA, all avenues such as Donor Advised Funds and other methods of charitable tax favored gifting should be evaluated. Philanthropic goals require study, planning, education, and best interest analysis based on the input and familiarity with a donor’s unique situation.
- Alignment with Philanthropic Objectives: The flexibility in investment management and custodianship must be used effectively to align the PPVA with the donor’s charitable intentions, whether for immediate impact or for creating a lasting legacy.
- Legal and Regulatory Compliance: The involvement of legal professionals is crucial to navigate the intricate web of laws and regulations surrounding PPVAs, trusts, and community giving. C3 Financial Partners does not provide legal advice but has unaffiliated referral sources who are well versed in that field.
PPVA presents a sophisticated and impactful way to support charitable causes. With their tax advantages, customizable investment options, and the ability to integrate into broader estate planning strategies, PPVAs represent a potential tool to consider when deciding how to support community organizations.
C3 Financial Partners can support clients planning their community giving and their other advisors by serving as a knowledgeable resource and a valuable part of a planning team. As always, feel free to reach out for additional information. We look forward to helping our clients and their advisors gain clarity in their goals and objectives, confidence that they are making decisions in their best interests, and coordination with other professional resources as needed.
¹ Private placement products offered by U.S. carriers to U.S. persons are subject to SEC regulations. Each purchaser
generally must be a ”qualified purchaser” under §2(a)(51) of the Investment Company Act of 1940, 15 USC §80a-2(a)(51), and/or an “accredited investor” under §501(a) of Regulation D of the 1933 Act, 17 CFR §230.501(a). A
“qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. An “accredited investor” is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.
2 Treasury Regulation §1.817-5 Diversification requirements for variable annuity, endowment, and life insurance contracts.
3 The Investor Control Doctrine for variable investment accounts was established with a series of revenue rulings dating back to 1977 – Rev. Rul. 77‐85, 1977‐1 C.B. 12, Rev. Rul. 80‐274, 1980‐2 C.B. 27, Rev. Rul. 81‐ 225, 1981‐2 C.B. 13, Rev. Rul. 82‐54, 1982‐1 C.B. Investor Control Doctrine safe harbors for both variable annuity and variable life investment accounts are articulated in Rev. Rul. 2003‐91, 2003‐2 C.B. 237. The Tax Court clarified in Webber v. Commissioner (T.C., No. 14336‐11, 144 T.C. No. 17, 6/30/15).
4 IRC §817(c). A “separate account” is a separate set of financial statements held by a life insurance company, maintained to report assets and liabilities for particular products that are separated from the carriers general account. Detailed statutory financial statement data and disclosures regarding the products and assets captured in a separate account can be found in SSAP No. 56—Separate Accounts.
Disclosures:
A Private Placement Variable Annuity (PPVA) is an unregistered securities product and is not subject to the same regulatory requirements as registered variable products. As such, PPVA should only be presented to accredited investors or qualified purchasers as described by the Securities Act of 1933. Any offer of sale must be preceded or accompanied by the current offering memorandum for the separate account and completion of the investor qualification questionnaire. PPVA insurance products are long-term investments and may not be suitable for all investors. An investment in PPVA is subject to fluctuating values of the underlying investment options and it entails risk, including the possible loss of principal. Investors should consider the investment objectives, risks, charges, and expenses of any PPVA policy carefully before investing. This and other important information about any PPVA are contained in the offering memorandum. Any withdrawal of gains from the PPVA would be subject to ordinary income taxes and could be subject to federal or state tax penalties on early withdrawals. The benefits and values are not guaranteed.
Securities offered through Valmark Securities, Inc. member FINRA, SIPC. Investment advisory products and services offered through Valmark Advisers, Inc., an SEC Registered Investment Advisor. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. C3 Financial Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
