Investment Diversification and U.S. Federal Tax Requirements

Michael C. Crawford  -  Mar 23, 2017    

U.S. tax law allows for the tax-deferred buildup of assets in a qualified DVA. To qualify for the favorable tax treatment, the investment portfolio must be adequately diversified. Currently, at the end of any calendar quarter, the policy assets must be invested as follows:

  • Five or more investments,
  • Not more than 55% of the value of the assets can be in one investment,
  • Not more than 70% of the value of the assets can be in two investments,
  • Not more than 80% of the value of the assets can be in three investments, and
  • Not more than 90% of the value of the assets can be in four investments.

The portfolio will be considered adequately diversified if it is diversified as of the last day of the calendar quarter (or 30 days thereafter). According to IRS regulations, market fluctuations will not result in violation of diversification requirements unless there has been an acquisition that is either wholly or partially responsible for the violation. In addition, the investor must cede control over the investment held in the account to an investment manager selected by the investor with the approval of an insurer.

Who should consider investing in a DVA Policy?

A tax-advantaged investment vehicle such as a DVA policy provides an excellent wealth management tool for maximizing after-tax wealth. The DVA policy is particularly appropriate for the following types of “accredited investors” and “qualified purchasers”:

  • Persons desiring to make a charitable bequest,
  • U.S. persons seeing tax-efficient access to non-U.S. investment funds,
  • Persons with excess after-tax funds looking for a tax-advantaged investment vehicle and
  • Persons who have excess investable assets after exhausting the insurance and reinsurance market capacities

Combined with certain trust structures, a DVA policy can achieve more complex tax and estate planning objectives.

Note: The information provided is for educational purposes only. It does not constitute legal, investment, accounting, tax or other advice. As with all legal tax matters, clients should consult with their personal financial advisor and tax advisor for information specific to their situation.

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Michael C. Crawford, CFP® CLU® ChFC®

Michael Crawford is the Principal at Nationwide Valuations and the founder of Nationwide Wealth Management, LLC. Michael Crawford of Red Bank NJ is an expert in Private Placement Life Insurance, Wealth Management, Financial Planning, Wealth Preservation, and Investment Banking. He can be reached at 1-888-399-5169.

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