“A handful of larger managers have long offered such products,” JPMorgan said in a white paper last year. “What is new, though, is the increase in the number of managers interested in launching IDFs and growing demand among private bank platforms seeking to partner with managers on such offerings.” The rising use of tax-avoidance plans among the wealthy widens the gap between rich and poor, said Gabriel Zucman, an economics professor at the University of California at Berkeley. “These forms of tax avoidance are one of the key reasons why income and wealth inequality are rising so much in the U.S.,” Zucman said. “These schemes allow very wealthy individuals to pay very little in taxes at the same time as effective tax rates paid by the working class are on the rise because of sharp increases in payroll taxes.” The IRS has been known to pounce if it believes IDF rules about keeping investors away from the fund’s investment strategy have been broken. In a 2015 decision, the U.S. tax court ruled that Jeffrey Webber, a venture capitalist who’d invested in variable life insurance policies, effectively retained control over the investments by using associates as conduits to direct the investment strategy of these funds. The result: a tax bill of about $400,000 on income realized by the accounts. Webber didn’t appeal and said he was happy about other aspects of the decision, including the lack of penalties imposed, according to his lawyer, Megan L. Brackney of Kostelanetz & Fink. The level of separation can raise issues, too. Lawrence Buchalter, a hedge fund manager who invested in IDFs through Philadelphia Financial, sued the company claiming it failed in its due diligence process when it invested in a hedge fund that lost money in a fraud scheme. Buchalter’s case was dismissed due to statute of limitations.
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