Private Placement Variable Annuities (PPVAs) are popular for those high-income individuals who intend to retire to a lower tax jurisdiction. For example, a New York State resident who plans to move to Florida can defer the income tax on their investment gains until they have relocated to a lower-tax jurisdiction, at which time they would take distributions and pay a lower effective tax rate.
Another application of PPVAs is for those who are interested in investing into hedge funds and other alternative asset classes. Many of these investments are highly tax-inefficient. Under a PPVA, taxes on these investments can be deferred.
PPVAs are also favored by individuals and families who intend to leave assets to a public charity or a private foundation at their death. If a charitable entity is named as the beneficiary of a PPVA, all of the deferred investment gains can be distributed tax-free to the charity. Unlike other charitable strategies that are irrevocable in nature, a PPVA remains under the full ownership and control of the contract owner and of the contract owner’s surviving spouse throughout their lifetimes.
For tax-exempt institutional investors, a PPVA eliminates unrelated business taxable income (UBTI).1 Taxed at corporate rates, UBTI can be somewhat lowered by the use of expensive and complex offshore corporate blockers. However, if a tax-exempt organization such as an endowment, pension, charity or foundation makes an investment into a UBTI generating asset through a PPVA, the investment and any distributions are recharacterized as an annuity and annuity income, respectively.
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[1] IRC §§1.512(b)-1(a) & 72(u) (Subchapter L). PLR 2002060047 & PLR 9708022
