What Is an Insurance Dedicated Fund (IDF)?
Insurance Dedicated Fund (IDFs) are hedge funds linked to a variable annuity or life insurance policies. The structure of an IDF allows for taxable investors to invest in hedge funds through insurance carriers on a tax-deferred or tax-free basis through Private Placement Life Insurance (“PPLI”) or Private Placement Annuities (“PPVA”). Unlike traditional life insurance, an investor would buy a PPLI policy principally as an income tax free investment vehicle.
Tax sensitive investors are familiar with the features of life insurance as an investment vehicle:
- The investment portfolio accrues on a tax deferred basis
- The policyholder can generally make tax-free withdrawals and loans against the policy’s assets during the insured’s lifetime
- The proceeds payable upon death of the insured aren’t subject to income tax
- Tax is deferred until time of withdrawal (every withdrawal is treated as a partial recovery of investment in the insurance contract so the rate of tax is reduced until entire investment is withdrawn) regarding annuity.
Timeline and Structure of an Insurance Dedicated Fund
Generally it will take 8-10 weeks to establish an IDF, and approximately 3-4 months to establish a stand-alone IDF. Akram team can assist you in structuring an IDF.
Diversification and Investor Control Doctorine IRS Rules
In order for the PPLI/PPVA to qualify for the deferral of income taxes, the legal format must meet the formation structure specified by the IRS (PDF) – it must be a separate legal entity attached to, but distinct from, the insurance company’s separate asset account.
The IDF must satisfy the diversification rules and the investment control rules under the IRC.
The diversification rules provide that:
- No one (1) investment can constitute more than 55% of the total assets of the account;
- No two (2) investments can constitute more than 70% of the value of the total assets of the account;
- No three (3) investments can constitute more than 80% of the value of the total assets of the account;
- No four (4) investments can constitute more than 90% of the value of the total assets of the account.
* The Investor Control Doctrine means:
- The IDF must be managed on an independent discretionary basis
- No PPVA or PPLI account owner can directly or indirectly influence the IDF manager with respect to the selection of funds or securities to fulfill the IDF’s investment mandate
The Investment Manager certifies the compliance regarding diversification rules under 817 (h) of IRC.
* According to a limited amount of case law and rule interpretations.
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