Overview of How Insurance Dedicated Funds Offer the Returns of Private Funds With the Favorable Tax Treatment of Insurance Products

Private funds employ innumerable different strategies. Some of those strategies can result in significant U.S. federal income tax burdens, however, either for the funds themselves or for their investors. Although those inherent inefficiencies have been ameliorated in some cases by decades of iteratively refined structures and thoughtful planning, insurance products often remain more tax efficient than private funds for their respective investors. As a result, there are a number of situations in which investors may prefer to access investment strategies through an insurance product, rather than a private fund. Those privately offered insurance products, typically either life insurance policies or variable annuities, invest in turn in private insurance dedicated funds (IDFs). In a guest article, K&L Gates partners Mark C. Amorosi and Yasho Lahiri provide an overview of the architecture of an IDF; the tax and regulatory considerations arising from its creation; and the various circumstances where an IDF can be attractive. For more on IDFs, see “Alternative Private Credit Structures: Adopting Insurance Dedicated Funds for Favorable Tax Treatment (Part Two of Two)” (Oct. 20, 2020); and “Direct Lending Funds: Five Structures to Mitigate Tax Burdens for Various Investor Types (Part Two of Two)” (Dec. 10, 2019).

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