The reference desk
Clear definitions for complex conversations.
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An individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They must satisfy one or more requirements regarding income, net worth, asset size, governance status, or professional experience.
Financial assets that do not fall into one of the conventional investment categories. Examples include private equity, hedge funds, managed futures, real estate, commodities, and derivatives contracts.
The strategy of deciding which investments to hold in different types of accounts (taxable, tax-deferred, or tax-exempt) to maximize after-tax returns.
A readjustment of the value of an appreciated asset for tax purposes upon inheritance. The cost basis of the transferred asset is stepped up to its fair market value, eliminating capital gains tax liability on prior appreciation.
A contractual provision whereby money already paid to an employee or investor must be returned to an employer or firm, typically triggered by specific conditions or underperformance.
A portfolio consisting of assets from several accounts that are blended together. This lowers the costs of managing the fund and provides greater diversification.
A type of loan made in a business or corporate finance context. It allows the borrowing business to take out money over an extended period of time rather than reapplying for a loan each time it needs money.
The payout to the beneficiary of a life insurance policy, annuity, or pension when the insured or annuitant dies. In PPLI, this benefit is typically income tax-free.
An investment fund that contains a wide array of securities to reduce the amount of risk in the fund. Under IRC § 817(h), specific diversification requirements must be met for a PPLI policy to maintain its tax-advantaged status.
A long-term trust created to pass wealth from generation to generation without incurring transfer taxes, such as estate and gift taxes, for as long as state law allows.
A doctrine in U.S. tax law under which a transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to be considered valid.
A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law.
A holding company owned by two or more family members, created to retain a family's business interests, real estate, and publicly traded and privately held investments.
A federal tax that results when there is a transfer of property by gift or inheritance to a beneficiary who is at least 37½ years younger than the donor, such as a grandchild.
An irrevocable trust that allows a grantor to pass a significant amount of wealth to the next generation with little or no gift tax cost. It involves the grantor receiving an annuity for a set term.
A pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques to improve performance, such as short selling, leverage, and derivatives.
An investment fund that is only available to investors who access it through a variable life insurance policy or variable annuity. It is designed to meet specific IRS diversification requirements.
An estate-planning tool that is used to freeze certain assets of an individual for estate tax purposes, but not for income tax purposes. The purposely 'defective' nature allows the grantor to pay income taxes on trust earnings, effectively making additional tax-free gifts to the trust.
A trust that cannot be amended or revoked, created to own a life insurance policy. It removes the death benefit from the insured's taxable estate.
A legal and tax structure (like PPLI) that 'wraps' around an investment portfolio, providing it with the tax treatment of life insurance.
The section of the Internal Revenue Code that defines what qualifies as a life insurance contract for federal tax purposes. Compliance is essential to receive tax-free death benefits and tax-deferred cash value growth.
An annuity contract structured to make payments over the lifetimes of two individuals, typically spouses, continuing to the surviving party after the first annuitant dies. Commonly used in retirement income planning for married couples and frequently incorporated into trust and estate distribution strategies.
An IRS tax form issued annually for an investment in partnership interests. Its purpose is to report each partner's share of the partnership's earnings, losses, deductions, and credits.
The additional return an investor requires for holding a security that cannot be easily or quickly converted to cash at its fair market value.
A life insurance policy whose funding has exceeded federal tax law limits. Once a policy becomes a MEC, withdrawals and loans are taxed on a last-in, first-out (LIFO) basis and may be subject to a 10% penalty if taken before age 59½.
The final return on an investment after all fees, expenses, and taxes have been deducted. In the context of PPLI, it represents the true after-tax, after-fee wealth accumulation.
Income earned by providing services or the sale of goods (e.g., wages, salaries, tips) as opposed to capital gains. Many alternative investments generate ordinary income, making them highly tax-inefficient.
A loan issued by an insurance company that uses the cash value of a person's life insurance policy as collateral. These loans are generally tax-free.
A customized variable universal life insurance policy designed for ultra-high-net-worth investors. It allows for a broader, non-retail range of investment options, such as hedge funds and private equity, within a tax-advantaged wrapper.
Similar to PPLI, a PPVA provides tax-deferred growth for customized alternative investment portfolios but lacks the life insurance death benefit and its associated estate tax advantages.
An asset class of privately negotiated loans and debt financing from non-bank lenders. It typically offers higher yields but generates ordinary income.
An alternative investment class consisting of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies.
A standard used by the SEC to determine who can invest in certain private funds. It generally requires an individual or family-owned business to own $5 million or more in investments.
Physical assets that have an intrinsic worth due to their substance and properties. Examples include real estate, land, commodities, and infrastructure.
A portfolio of assets managed by a professional investment firm. Unlike mutual funds, the investor directly owns the individual securities.
An irrevocable trust created by one spouse for the benefit of the other spouse. It removes assets from the couple's combined taxable estate while still allowing indirect access to the funds.
The reduction in potential investment returns due to taxes on income and capital gains. PPLI is specifically designed to eliminate tax drag.
A federal tax credit that effectively exempts a cumulative dollar amount of an individual's taxable gifts and estate from federal gift and estate taxes. The exemption is shared across both gift and estate tax calculations, and the applicable amount is set by Congress and subject to change under current law.
A type of permanent life insurance policy that builds cash value. It combines a death benefit with an investment feature, allowing the policyholder to allocate premiums to various investment sub-accounts.
The passing of wealth and assets from one generation to the next. Strategic wealth transfer planning minimizes taxes and legal complications.
A calculation method used to determine the internal rate of return for a series of cash flows occurring at irregular intervals. Widely used in private equity, venture capital, and alternative investment reporting, where capital calls and distributions are not evenly spaced over time.
The income generated by an investment over a specified period, expressed as a percentage of the investment's cost or current market value. Yield may take the form of interest, dividends, or other distributions and is a primary measure of current income for fixed-income and alternative investment portfolios.
A fixed-income security that does not pay periodic interest. It is issued at a discount to its face value and redeemed at full face value upon maturity, with the difference representing the investor's total return. Commonly used in estate planning structures and long-duration investment strategies.
