The investor control doctrine: when 'hands off' really means 'hands off'.

• Author: Rand, Gary

In Webber, 144 T.C. No. 17 (2015), an individual, rather than the insurance company, was determined for tax purposes to be the owner of assets in segregated asset accounts that were held for the benefit of private placement variable fife insurance policies. As a result, the individual was liable for tax on the income earned by those assets.

The Basics

A variable fife insurance policy is a cash-value policy with an investment component allowing the owner to allocate premium dollars to a separate account comprised of stocks, bonds, funds, and other investments within the insurance company's portfolio. A private placement life insurance policy (PPLI) is a type of variable life insurance policy where the investments within each policy are customized and are not limited to the insurance company's portfolio of investments.

If the assets in the separate accounts perform well, the policy's value may substantially exceed its minimum death benefit. Upon the insured's death, the beneficiary receives the greater of the minimum death benefit or the value of the separate account, either one of which is tax-free.

The Facts

Jeffrey T. Webber, a successful private-equity investor, on the recommendation of his tax advisers, including William Lipkind, an estate-planning lawyer, purchased PPLI as one part of an overall estate plan.

In 1999, Webber contributed $700,000 to a grantor trust in which the trustee purchased two "Flexible Premium Restricted Lifetime Benefit Variable Life Insurance Policies" (the policies) from Lighthouse, a life insurance company based in the Cayman Islands. The beneficiaries of the policies were Webber's children, his brother, and his brother's children. Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, were timely filed reporting the completed gifts. The policies insured the lives of two of Webber's relatives who were ages 77 and 79. The policies each had a minimum guaranteed death benefit of $2,720,000. After subtracting administrative fees, the premiums were allocated to separate accounts for each policy.

Lighthouse did not provide investment advice but permitted the policyholder to select an investment manager from an approved list. Webber selected Butterfield, an investment management company, and paid the company a nominal fee.

Some terms of the policies included that:

* No one but the investment manager may direct investments;

* The policyholder could transmit "general investment objectives and...