US Treasury May Attack Hedge Fund Insurance 'Wrappers'

by Mike Godfrey, Tax-News.com, New York

12 September 2002

US Treasury Department acting assistant secretary Pamela Olson confirmed this week that the Treasury is studying tax minimisation methods linked to hedge funds and often employing offshore jurisdictions which it thinks may constitute tax evasion.

In a plain vanilla version of the technicque, an investor buys an insurance policy that invests the premiums in a hedge fund or funds the investor chooses from a list. Growth in the insurance policy is tax-free, and if the policy is structured correctly it also escapes inheritance tax.

A more complex version of the structure employes an offshore insurance company to make the hedge fund investments and investors but shares in the insurance company in order to share in the growth of the hedge fund.

Although many of these arrangements are legal under current rules, those involving offshore companies may be abusive, says the Treasury. Pamela Olson said that the department is well aware of the hedge fund strategies: "We have under way several projects addressing their proper tax treatment - projects we expect to release shortly," she said. "The proper tax treatment may well not be as advertised" by promoters, she warned.

Rosemary Gilchrist, an executive of Tremont Advisers Inc., told the Wall Street Journal that one likely issue for the Treasury Department is whether some insurers are giving investors too much control over their investments. The Treasury also might be exploring whether offshore companies are taking enough real insurance risk in order to justify their special tax treatment, or whether they are simple 'put-through' shells. An insurance company is of course entitled to make investments with its retained capital and reserves, but only as an ancillary activity to its insurance business.

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