Privately replace taxes in your hedge fund

By Justin Hunter

Just about everything from a new pair of slacks to your investment portfolio is taxed. The majority of people go about life paying taxes on everything whenever we are told to because it is easier than trying to figure out ways around it. But sometimes all you have to do is stop to read a catchy headline and save extra cash by not having to pay unnecessary taxes.

If you own a hedge fund, you may already know about ways to sneak around taxes, as most investors with this type of fund are already savvy in the business and governmental world.

Regardless of whether you currently pay taxes on your hedge fund, Rachel Emma Silverman’s article, “Insuring Against Hedge-Fund Taxes” posted in the October 18, 2006 edition of The Wall Street Journal, provides an effective way to elude those costly taxes on your hedge fund that may also open up some additional financial doorways.

For the laymen out there, a hedge fund is a private investment fund that is characterized by unconventional investment strategies. In contrast to regular investment funds, which are usually limited to “long term” tools, hedge funds also offer “short term” instruments which leads to a more complex structure of “hedging” funds.

Now, a growing number of wealthy investors have developed a way to bypass paying taxes on hedge fund gains.

“It's called ‘private placement’ life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes -- as is the payout upon death. What's more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy, depending on how it's set up.”
Private placement insurance policies are basically variable insurance policies, in which policyholders are allowed to invest a fraction of their premiums in separate investment accounts.

Although there are a variety of benefits to this, the primary attraction of the private-placement life insurance is the tax benefit, which stipulates that assets within a life insurance can accumulated tax-free and the death benefit can be withdrawn also free from taxation.

“Investors have long used the tax benefits of plain-vanilla variable life-insurance policies and annuities to invest in mutual funds. But private-placement policies allow users to invest in a far-wider range of options, including hedge funds, derivatives, real estate investment trusts and timber.”

This tax break on hedge funds is crucial since short-term gains are often reported, constituting payment of up to 35 percent in federal taxes.

“Interest in private-placement life insurance comes as the hedge-fund market has ballooned in recent years -- although recent troubles at funds such as Amaranth Advisors and less-then-stellar returns are taking some of the luster out of the sector. As of this summer, some $1.23 trillion was invested in nearly 9,000 hedge funds and funds of funds -- which pool various hedge funds together -- more than double the amount five years ago, according to Hedge Fund Research in Chicago.”

Don’t waste precious tax dollars. Join the elite field of intelligent investors and expand your portfolio with a private-placement life insurance policy.

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