Monthly LRA Update: December 2024 (2)

LEGISLATIVE DEVELOPMENTS

Wyden Releases Proposed Legislation Targeting Private Placement Life Insurance

On December 16 Senate Finance Committee Chair Ron Wyden (D-OR) released draft legislation to alter the tax treatment of certain private placement life insurance (PPLI) contracts. This draft legislation was prepared in connection with the report, “Private Placement Life Insurance: A Tax Shelter for the Ultra-Wealthy masquerading as Insurance,” issued by the Finance Committee in February 2024.

The proposal would add Section 7702C (“Treatment of Applicable Private Placement Contracts”) to the Internal Revenue Code. A contract that is deemed to be a Private Placement Contract (“PPC”) would not be treated as an insurance or annuity contract. Therefore, such a contract would be subject to tax on the inside build-up and on any death proceeds in excess of basis.

In general, PPC is defined as any private placement contract whose underlying segregated asset account does not support at least 25 private placement contracts owned by unrelated parties. Additionally, the value of each contract must be determined on a pro rata basis.

The proposal would be effective upon the date of enactment, applying to existing contracts as well as new contracts. For existing contracts, all prior earnings must be taken into account. The proposal provides limited transition relief under which an existing contract has 180 days to be exchanged or converted to a non-PPC.

In total, the proposal appears highly skeletal and looks to grant broad authority to the IRS to implement the proposal in a feasible manner.