Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Mortality Pools for Tax-Free Income
Transcript
- Lucas: You might think the ultra-wealthy have exhausted every tax strategy under the sun. But there’s one I only came across last year, and it’s genuinely outside the mainstream — even for family offices. Luna: I’m intrigued. Is this something that actually works, or is it a theoretical loophole that the IRS shut down decades ago? Lucas: It’s real, and it’s legal. It’s called a mortality pool. The basic idea: a group of high-net-worth individuals pool money together. As members pass away, the survivors receive tax-free payouts from the pool. The last one standing gets the whole pot — tax-free. Luna: That sounds a bit morbid. How is that not just an unregistered insurance product? Lucas: Fair question. The key is that it’s structured as a private, non-commercial arrangement. No insurance company involved. It’s essentially a group of individuals agreeing to share longevity risk among themselves. The IRS has issued private letter rulings confirming that proceeds from a properly structured mortality pool are not subject to income tax — they’re treated as gifts or inheritance, well within the annual gift tax exemption limits, depending on the structure. Luna: So you need a group of people willing to effectively bet on each other’s lifespans. That seems like a hard sell, even among friends. Lucas: It is, but it’s happening. I spoke with a family office in Florida that helped set up a pool with 20 participants, each contributing $5 million. The pool total is $100 million. The actuarial projections suggest participants could see annualized returns of 8 to 12 percent — completely tax-free — over the expected life of the pool. That’s competitive with many taxable fixed-income strategies. Luna: How do you avoid adverse selection? The healthiest people would want to join, and the ones who expect to die sooner might not — but if they do, they’d skew the pool. Lucas: That’s the biggest risk. Most pools require medical underwriting — essentially, participants must provide health records and meet certain actuarial standards. Some pools also use a ‘blind’ contribution structure where no one knows who else is in the pool, to reduce the chance of selecting against the pool. And the contract typically has a minimum number of participants, say 15 or 20, to diversify mortality risk. Luna: So you’re essentially creating a private annuity with no insurance company markup. But what about liquidity? You can’t sell your interest, right? Lucas: Exactly. This is a long-term commitment. Liquidity is terrible. If you need the money back early, you have to find a buyer in a secondary market that barely exists. And the pool itself can take decades to fully liquidate. So this is really for money you don’t need for the next 20-plus years. It’s estate planning, not a checking account. Luna: And the tax-free aspect — does that hold up under the current IRS scrutiny? I remember the SECURE 2.0 Act made some changes to pooled retirement plans. Does that affect mortality pools? Lucas: SECURE 2.0, which took effect January 1, 2026, mainly affects retirement plans like 401s and pooled employer plans. Mortality pools fall outside that framework because they’re not retirement plans and not insurance products. However, the IRS has been issuing fewer private letter rulings in this area in recent years. The last one I could find was from late 2023. So there’s some regulatory uncertainty, but the basic legal framework — based on gift and estate tax principles — remains intact. Luna: Let’s talk about the numbers. If I’m a 60-year-old in excellent health, and I put $5 million into a pool with 19 other similar individuals, what does my return profile actually look like? Lucas: Actuaries model this using life expectancy tables from the Society of Actuaries. For a pool of 20 individuals aged 60, the expected duration is about 25 to 30 years. The first death might occur around year 10. At that point, the pool pays out a portion — say $5 million divided among the 19 survivors. Each survivor receives roughly $263,000 tax-free. The later deaths happen more frequently, so the payouts accelerate. The internal rate of return depends on the actual mortality experience, but typical projections show IRRs in the 8 to 12 percent range. Luna: And that’s tax-free because the IRS treats it as a gift from the deceased to the survivors? Lucas: Right. Under current gift tax rules, each survivor receives a gift from the estate of the deceased. As long as the annual gift per person stays under the annual exclusion — which is $19,000 in 2026 — there’s no gift tax. Most mortality pools are structured to distribute the death benefit in increments that stay under that threshold per participant. For example, if the deceased’s share is $5 million and there are 19 survivors, each gets about $263,000 — that’s well above the annual exclusion. So the excess would reduce the survivor’s lifetime estate and gift tax exemption, but there’s no immediate tax. Luna: That’s a nuance I hadn’t considered. So it’s not completely tax-free — it uses up your lifetime exemption? Lucas: Correct. The death benefit is income-tax free under current law, but it can trigger gift tax considerations. However, for ultra-high-net-worth individuals with estates well above the exemption — currently $13.61 million per person in 2026 — using up some exemption is acceptable. They’re going to face estate tax anyway. This just shifts when and how the tax is paid. And the benefit is that the growth inside the pool is never taxed as income. Luna: And if you live to be the last one standing, you get the entire remaining pool — which could be $100 million or more — and you pay nothing in income tax? Lucas: That’s the theoretical maximum. But in practice, the last survivor receives the final distribution as a gift from the last deceased member. Again, income-tax free, but it counts against the estate exemption. Still, if you’ve lived to 95, your estate plan is probably already well-structured. Luna: It reminds me of tontines — those old investment schemes from the 18th century that eventually got outlawed because of fraud. Lucas: Exactly the comparison. Tontines were popular in the 1800s but were banned in most states after scandals. Modern mortality pools are different because they’re transparent, have clear legal documentation, and don’t involve a promoter who might run off with the money. They’re structured as a simple contractual agreement among peers. Some family offices use a trust to hold the pool assets, with an independent trustee. Luna: So who is actually doing this? Is this something you need $50 million in assets to even consider? Lucas: Generally, yes. The pool size needs to be large enough to diversify mortality risk, and the participants need to have enough wealth that they can lock up $5 million or more for decades. But there are smaller pools — some with $1 million contributions and 10 participants. The economics are less attractive because the fixed legal and actuarial costs eat into returns. But for a family office managing $200 million or more, this can be a meaningful component of the estate plan. Luna: Are there any publicly known examples? Or is this all under the radar? Lucas: It’s mostly under-the-radar. I found one academic paper from the University of Chicago that analyzed the concept, but the actual pools are private. The family office I spoke with asked not to be named. But they’ve been running their pool since 2018, and so far, the returns are tracking roughly in line with projections. Luna: I want to zoom in on the ethical side. You’re essentially benefiting from someone else’s death. That feels uncomfortable. Lucas: It does. And I think it’s important to be honest about that. The participants are all aware of the structure. They’re not wishing anyone ill; they’re planning for a statistical outcome. It’s similar to buying an annuity — you’re betting you’ll live a long time, and the insurance company is betting you won’t. Here, the bet is among peers. The ethical discomfort is real, but for many wealthy families, the tax efficiency outweighs the ick factor. Luna: What happens if a participant wants to withdraw early? Can they sell their interest to someone else? Lucas: There is a secondary market, but it’s thin. Some pools allow a participant to assign their interest to a family member, but selling to an outsider requires unanimous consent. The contract usually prohibits assignment to someone with a shorter life expectancy, to protect the pool. So liquidity is very limited. This is really ‘set it and forget it’ money. Luna: And what about the legal costs to set one up? I imagine you need a good tax lawyer and an actuary. Lucas: You do. Setting up a mortality pool with 20 participants might cost $100,000 to $200,000 in legal and actuarial fees. Annual administration is another $10,000 to $20,000. That’s a barrier to entry, but for a pool of $100 million, it’s a small price. The tax savings over 20 years can be in the millions. Luna: So the ideal candidate is a 60-year-old with $10 million-plus in investable assets, excellent health, and a family office that can handle the complexity. Lucas: That’s exactly right. And they need to have a long time horizon and no need for liquidity. It’s a niche within a niche. But for those who fit the profile, the combination of tax-free income and estate tax reduction is hard to beat. Luna: It makes me think about how many other obscure strategies are sitting out there, quietly used by the ultra-wealthy, that most of us never hear about. Lucas: That’s one reason we do this show. Every episode, we try to pull back the curtain just a little. And if our conversations have helped you think about your own financial decisions differently, we’d love your support. It keeps the show ad-free and independent. You can buy us a coffee at buymeacoffee.com/fexingo. Luna: Yeah, every little bit helps us keep digging into these stories. And we really appreciate it. Lucas: Now, back to mortality pools. One thing I didn’t mention: the tax treatment could change if the IRS decides to reclassify these arrangements as insurance contracts. That would make the death benefit taxable as income. But for now, the prevailing legal opinion is that they remain outside the definition of insurance because there’s no risk transfer to a commercial entity. Luna: So there’s a regulatory cliff risk. If the IRS or a court recharacterizes it, the entire tax advantage disappears. Lucas: Exactly. Anyone considering this needs to have a high tolerance for regulatory uncertainty. But then again, that’s true for many cutting-edge tax strategies. Luna: Let’s talk about alternatives. How does this compare to something like a private placement life insurance policy? Lucas: PPLI also offers tax-free growth and tax-free death benefits, but it comes with insurance company fees and requires you to qualify for a policy. Mortality pools have no fees to an insurance company, but you bear the mortality risk yourself. PPLI is more liquid — you can surrender the policy or take loans against it. Mortality pools are illiquid. PPLI also has a more established regulatory framework. Mortality pools are still in the grey area. Luna: So if someone is deciding between the two, what would you say? Lucas: I’d start with PPLI unless you have a clear reason to prefer a pool. PPLI is simpler, more liquid, and more tax-certain. But if you have a large group of like-minded individuals and a long time horizon, a mortality pool can generate higher after-tax returns because you’re not paying insurance costs. Luna: And what about the social aspect? Does being in a pool with friends change the dynamic? Lucas: It can. Some families prefer to pool with people they know — other family office clients, business partners — because there’s trust. But that also increases the risk of adverse selection if the group shares a common health risk. Ethically, it’s also harder to benefit from a friend’s death than from a stranger’s. Luna: So anonymity might actually be better from both a financial and emotional perspective. Lucas: Many advisors recommend a blind pool for exactly those reasons. You never know who died or how much you received from whom. It’s all handled by the trustee. Luna: One last question: if I wanted to explore this, where would I start? Lucas: Talk to a tax attorney who specializes in private placement strategies. They can connect you with actuaries who model mortality pools. And they can help you assess whether it makes sense given your overall estate plan. Expect a lot of due diligence. This is not a DIY strategy. Luna: Fair enough. It’s fascinating to know this exists, even if I won’t be joining a pool anytime soon. Lucas: Same here. But it’s a reminder that the tax code is full of opportunities for those who can afford the expertise to find them.