Originally published in Journal of Taxation of Investments – Winter 2012.
This article provides an overview of the use of the private placement group variable deferred annuity contract (also known as a group annuity contract, or CAC) by tax-exempt and foreign investors. While for most tax practitioners the use of the CAC as an investment structuring vehicle for institutional investors is largely unknown, most large life insurers have used this structure for wholly owned investment advisory firms for the last several decades-unnoticed and without the assistance of the same carriers’ large agent field force. The estimate is that well in excess of $50 billion of institutional investments for tax exempt investors have been structured using the CA C. The author traces the historical roots of the marketplace, and overviews what other life insurers are now doing in this marketplace. He analyzes the tax considerations and also focuses on alternative tax planning used by tax-exempt and foreign investors for unrelated business taxable income and the consequences under the Foreign Investment in U.S. Real Property Tax Act. The primary focus on the use of the CA C by foreign investors is foreign public (sovereign) and private pension plans.
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