The Senate is targeting life-insurance policies that allow the rich to pass down everything from stocks to yachts to their kids tax-free. Here's how it works.

The PPLI policy premiums are funded with assets. The assets must be diversified — typically with at least five different asset classes — and could include stocks and business interests, as well as tangible assets like yachts and real estate.

Depending on the client’s age, nationality, and other factors, the death benefit could, in theory, max out at $100 million, Malloy said.

If structured correctly, the benefit and the assets in the policy are passed to the children without incurring an estate tax. A 40% federal estate tax applies to estate values topping $13.61 million for individuals and $27.22 million for married couples.

Unlike with policies from US insurers, clients can cancel their policies without paying a massive surrender fee. The assets also grow within the trust tax-free. The cash value of the PPLI policy assets is held in a separate account, and this cash can be disbursed to the policyholder or invested. Investing in hedge funds is a popular use of PPLI assets.

But there’s a catch. Policyholders have limited control over investment decisions. They cannot give directives to the asset manager to buy a certain number of shares in Apple, for instance.

It also requires a small army of professionals, including trust and estate attorneys, asset managers, custodians, and tax advisors. Since PPLI is relevant only to the ultrawealthy, few in wealth management or law are familiar with it.

“There’s no questions on the CPA exam or the bar exam about PPLI, and asset managers are kind of skeptical,” Malloy said. “They think you’re going to take assets away. Actually, the assets become stickier and get more alpha because the client pays less tax.”

Under Wyden’s proposed legislation, most PPLI policies would be classified as “private placement contracts,” or PPCs, rather than life insurance policies. As such, any accumulated earnings and death benefits could be taxed.

The bill would apply to future and existing PPLI policies, giving policyholders 180 days to liquefy the assets or transfer them. Insurers who issue or reinsure the policies would no longer have the benefit of secrecy. To better enable the IRS to enforce the bill, insurers would have to report all PPCs or face a $1 million fine for each 30-day period that they fail to do so.

The bill faces steep odds of passing after Donald Trump’s reelection and with a Republican House and Senate. The insurance industry is counting on it.

“This legislation is an attack on all forms of permanent life insurance and, by extension, an attack on holistic financial planning,” Marc Cadin, the CEO of the trade group Finseca, said in a statement. “We look forward to working with the new Congress and the Trump administration to advance policies to move our country forward rather than raising taxes on life insurance.”

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