Insurance Dedicated Funds, a hot tax avoidance plan

Your Guide to State, Local, Federal, Estate + International Taxation

insurance dedicated funds, tax avoidance, taxWhile they’ve been around for at least the last couple of decades, a previously little known investment/insurance vehicle known as Insurance Dedicated Funds (IDFs), seems to have come out of hiding and become the latest thing in tax avoidance strategies. While there is no official accounting of how much money has been invested, it’s been said by some the amount is now triple of what it was a decade ago.

IDFs are essentially an IRS compliant structure defined under code section 817 which has stood the test of time and scrutiny by the IRS. It’s a vehicle that allows money managers to create a fund inside an insurance “wrapper” and manage multiple clients’ assets in a tax advantaged environment. The main advantage of these investments is the ability to grow the funds without any tax.

Structured properly, beneficiaries get their money income tax-free when the insured person dies. A qualified IDF has to abide by very specific rules regarding investor control (basically you have none) and diversification. The IRS has been known to pounce if it believes IDF rules about keeping investors away from the fund’s investment strategy have been broken.

Historically, there have only been a small number of fund managers offering this product but that is changing as the word gets out on these. Also as word gets out, there is a concern that IDF’s popularity with wealthy investors will exacerbate the ever growing wealth gap in the U.S, which in turn could garner political motivation to have this tax favored strategy ended. So, your time frame could be limited. But if Insurance Dedicated Funds sound like they may be right for you, make sure you talk with a fund manager well versed in them.

Dale F. Jensen, CPA