US Hedge Fund Investors May Face Large Back Tax Bills

by Carla Johnson, Investors Offshore.com

07 November 2002

An IRS private ruling last week could mean that thousands of US investors are facing large back-tax bills as a result of their life insurance policies, according to a Financial Times report yesterday.

The newspaper revealed that the investors were offered hedge fund investment as a choice by various life insurance companies, who assured them that the return on their investment would be tax-free. However, the Internal Revenue Service has decided that despite their insurance product 'wrapping', the hedge fund investments were not eligible for tax-free status.

According to the FT: 'to maintain the tax-free status, hedge managers will have to set up separate funds to be sold purely through insurance companies'.

However, US tax experts have suggested that although the ruling will undoubtedly make things more complicated for hedge funds and insurance providers alike, the potential benefits are likely to outweigh the costs:

'Insurance companies can bring small investors into hedge funds which otherwise have to register with the SEC in order to be able to sell directly to individuals,' the FT explained on Wednesday.

Recommended