Deferred-Comp Ruling Boosts Insurer

From Hedge Fund Alert

A recent IRS ruling on deferred compensation couldn’t have come at a better time for a life insurer pitching a new product aimed at easing the tax burden for hedge fund managers.

In the wake of the Emergency Economic Stabilization Act of 2008, which prohibited fund managers from keeping their incentive bonuses in offshore funds to avoid paying taxes, Crown Global Insurance began designing a universal life insurance policy that would achieve essentially the same result. In April, the firm’s tax lawyers gave it the green light to begin marketing its Fund Advisor Benefit Plan, which allows investment professionals to park their bonus compensation in their own funds via universal-life plans.

Crown Global already has received positive responses from about 15 fund shops, and a June 10 “revenue ruling” from the IRS promises to help the marketing effort. The IRS guidance focused on the use of stock options to structure deferred-compensation plans, thus enabling fund professionals to postpone their tax obligations until the options are exercised. There was nothing in the 2008 law prohibiting the use of options for that purpose, but before this month’s ruling most law firms had been advising their hedge fund clients to steer clear of the practice.

Now that the uncertainty has been removed, stock-options specialist Optcapital has begun advising fund operators on setting up deferred-compensation plans. Crown Global executives, meanwhile, are confident the IRS ruling also applies to life insurance policies.

Such compensation plans generally are attractive to institutional investors because they ensure managers have skin in the game for the long run. “What the manager is saying with our plan is that I’m going to be invested alongside you and I’m going to be invested alongside you for life,” said Gary Alexander, head of business development at Crown Global.

The New York insurer, led by chief executive Perry Lerner, already sells “private placement” insurance to wealthy individuals. Those policies allocate client capital to an array of sophisticated investments — primarily hedge funds. The investment gains accumulate on a tax-deferred basis and distributions to beneficiaries are tax-free.