The new hot thing in tax avoidance has a boring old name: insurance dedicated funds.
Introduced in the 2000s, IDFs have become so mainstream that banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. are offering them. Hedge funds like Paulson & Co. and Israel Englander’s Millennium Partners LP have been managing them for years.
For investors, the products provide a legal way to avoid taxes. For investment firms, the premiums are “sticky” — they make for stable, long-term sources of capital that act as a bulwark against client redemptions at a time when clients just pulled $75.6 billion from hedge funds in the five quarters through March, according to Hedge Fund Research.
How it works: The client buys a private-placement life-insurance policy. The insurance company invests in alternative assets such as hedge funds. Profits, if any, would ordinarily be taxed as capital gains, but because it involves an insurance company, which must abide by certain restrictions, the money can grow tax-free. Beneficiaries get their money when the insured person dies. For products structured correctly, there aren’t any levies on death benefits.