EWP Stories-4

Expanded Worldwide Planning
International Tax Planning
Stories
Part 4:
Succession Planning

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Many countries, primarily in civil-law jurisdictions, require forced distribution of assets at death according to strict laws and regulations. This usually takes the form of percentage shares of assets that will be distributed to spouses, children, and other close relations of the deceased. A PPLI policy purchased outside the home country of the owner or policyholder is a method to mitigate these forced heirship rules.

The PPLI policy is a contract between the owner of the policy and the insurance company to pay the beneficiary of the policy the death benefit upon the death of the insured under the contract. A typical beneficiary provision of a life insurance policy states: “unless an alternate payment plan, acceptable to us, is chosen, the proceeds payable at the insured’s death will be paid in a lump sum to the primary Beneficiary. If the primary Beneficiary dies before the insured, the proceeds will be paid to the contingent Beneficiary. If no Beneficiary survives the insured, the proceeds will be paid to your estate.”

Since a typical PPLI policy is executed outside the home country of the policy owner, the forced heirship laws do not apply, as the policy will be governed by the laws where the insurance company is domiciled.

This element of EWP, (Expanded Worldwide Planning), provides a wealth holder an excellent method to enact an estate plan that conforms to his/her own wishes, and not be dictated by the forced heirship rules of his/her home country. To be successful this needs to be well-coordinated with all the aspects of a properly structured PPLI policy, as well as all the other elements of a wealth owner’s financial and legal planning.

Here is a list of countries where forced heirship laws exist today in a variety of forms:

  • France
  • Switzerland
  • Germany
  • Turkey
  • Mexico
  • Brazil
  • Argentina
  • Italy
  • Spain
  • Russia
  • Japan
  • Saudi Arabia
  • Yemen
  • Jordan
  • Iran
Part 1

Andre Simmons toyed with staying at the Hotel Cala di Volpe on Sardinia’s Costa Smeralda. He could easily afford the $41,000 nightly rate for the penthouse suite, but preferred staying on his superyacht that was anchored in Porto Vecchio near the village of Porto Cervo.

Andre liked people, so was feeling a little lonely, as he had given his crew the morning off after their voyage from Miami, Florida. They had had a rough crossing on the Atlantic, dangerously riding 30 foot swells through a nasty storm that had unexpectedly come upon them. By contrast the water in Porto Vecchio was like glass with barely a ripple on the mirror-like surface.

The weather was perfect. He decided to go for a swim before his usual breakfast of coffee, bagel, and cream cheese. The bagel brought to mind New York City and his attorney. Delaying his breakfast for a swim did not bother him, but delaying action on his attorney’s advice was causing him some worry. He had reached a state of mental paralysis on what to do about passing his billions to his wife and children. Maybe he could think more clearly after a long swim.

Andre put on his bathing suit, and went through the spa center on the lower deck which had direct access to the water. The first plunge brought an accelerating tingle of pleasure. He was powering through the water, aided by just his own arms and legs. In these first moments in the water, he felt like a splendid fish, and not the owner of a magnificent, 150 ft., superyacht that had all the amenities money could buy.

The salt water was buoyant like only the Mediterranean could be. Andre was a strong swimmer and headed out of the bay. Soon his yacht had shrunk to the size of a much more modest craft.

At first it seemed like an annoying muscle pain in his chest, as he vigorously swam out to sea. The pain persisted. His youthful athletic training told him just to ignore it. He probably needed to do more stretches. At 48 his body was beginning to show its age.

The burning pain now became intense. He saw nobody in sight. It was 6:30am. No other swimmers, no other boats, nobody to hear a cry that he now could not make.

In view of this most exclusive enclave of wealth, this gorgeous seascape took him. He helplessly sank. Water poured into his lungs. He continued to sink. This beautiful bay had claimed a billionaire. He could do nothing but yield to nature’s will.

If his dead body is not found soon, the sharks will find it. His estate will suffer the same fate, but his $10billionU.S. of assets will be found, and, since he failed to leave a will, it will meet a similar fate: not an orderly deposition of this vast worldwide financial empire, but a hacking and a continued hacking until those contesting this fortune wished it would stop. It will not stop until the last legal contestant makes their last legal challenge in five to ten years hence.

A Brief History of Forced Heirship

The notion of forced heirship originated with Germanic tribe tradition, which sought to protect the family’s legacy and tradition. The deceased’s personal property was divided into thirds–the widow’s part, the children’s part, and a third part, which consisted of clothes, weapons, and farm animals.

Forced heirship is mostly prevalent amongst civil law jurisdictions and in Muslim countries, but also occurs in other major countries such as the U.S.A. (in Louisiana) and Japan.

There is a substantial difference between civil law jurisdictions and common law jurisdictions. Civil law is rooted in Roman law, and has the functions of the legal system codified and compiled into a collection readily available for citizens to reference. This legal structure requires the judge to rely on the black letter meaning of the law and disregards individual interpretation.

Common law, however, has its rules and regulations administered by judges. This type of individual judicial administration and decision-making allows enforcement of the law to vary on a case-by-case basis rather than on the black letter meaning of the law.

Civil law jurisdiction laws are heavily based on the German Code (BGB) and the Napoleonic Code. Today, the civil law legal system has become the most widespread of all the legal systems globally. Continental Europe, as well as many former European colonies, has adopted and evolved their laws to abide by the civil law structure. This has led to a continued reliance on the notion of forced heirship. The tradition of forced heirship has historically provided a means for heirs to be guaranteed a share in a decedent’s estate

Civil Law vs. Common Law Examples of Conflict

International families can eliminate the vagaries of court decisions which hinge on details of the law like inter vivos transfers versus testamentary transfers by using a properly structured PPLI policy. This policy will secure their own estate planning wishes using a legally binding contract between the wealth owner and an insurance company with no need of court decisions in any jurisdiction.

United States and Spain

In general the domiciliary jurisdiction at the time of a testator’s death controls movable property. But in this case (Wyatt v. Fulrath, 211 N.E.2d 637,N.Y. 1965) the New York court ruled that the expressed agreement by the couple that New York law was to apply to these assets that were moved to New York. The ruling was sufficient to allow New York jurisdiction and law to override Spanish law.

The law of Spain would have prevented either spouse from agreeing that community property goes entirely to the survivor on the death of either, which was their expressed agreement in New York. Under Spanish law, the surviving spouse would only receive half of the community property deposited in the joint New York bank accounts.

United States and France

In a 2009 New York case (Re Meyer 876 NYS 2d 7, App Div 1st Dept 2009) the court made a distinction between a lifetime, inter vivos, transfer and a transfer at death by will or trust. At issue were gifts of property made during lifetime by a person who was allegedly a French domiciliary at the time she made the gifts.

The court ruled that the gifts were not subject to forced heirship claims because: “the validity and effect of these transfers, as well as the capacity to affect them, are governed by the law of the state where the property was situated at the time of the transfer.”

The Court went on to say that: “[w]e perceiver no valid policy distinction that would allow a nonresident testator to avoid French heirship claims by involving New York law with respect to assets physically situated in New York…but not with regard to previous inter vivos transfers of assets physically situated [in New York].”

Part 2

Charlotte Simmons could not say exactly why she found herself standing before Theodore Gericault’s painting, The Raft of the Medusa, at the Louvre Museum in Paris. For Charlotte museums were akin to a religious experience: a deeply internal religion of her own devising, not a religion with a recognizable label.

The tragic scene of shipwreck depicted so dramatically by Gericault had called out to her that morning, as she left her apartment near the Louvre. She was one of the first to arrive at the museum, and had the painting to herself.

This very large painting (16 ft. by 23 ft.) depicts the moment of rescue for a hurriedly constructed raft that originally held at least 147 people that was set adrift from a French naval ship off the coast of West Africa in 1816. All but 15 died before their rescue, and those who managed to survive endured starvation and dehydration and practiced cannibalism.

Her cell phone buzzed in her purse, and she sought refuge on the large, black bench in front of the painting, taking the phone against her ear, and leaning over to hide it, but the guard spotted her phone, and began moving stridently toward her.

“Bonjour,” she said in her unrecognizable, cultured accent, the product of living in three continents.

“Is this Mrs. Simmons,” said a voice devoid of any emotional signposts.

“Yes, it is.”

“Madame” began the guard. She heard her speaking English, and continued, “No mobile phones, Madame, you must leave the gallery now.”

“I have terrible news for you. Your husband is dead.”

The guard then became quite agitated, “Madame, I must insist.”

Charlotte looked up imploringly to the short, bespectacled, young woman that now stood directly above her, tears ruining the makeup on her exquisitely featured face. She barely heard the rest of the monotoned, formal rendition of finding Andre’s body floating a few hundred meters from his superyacht. The voice concluded with an obligatory condolence, and a phone number for the police in Porto Cervo.

The guard now had placed her hands on her hips. Charlotte lifted her head to see her exasperated, reddening face, now inches from hers, as she tried to make himself understood, thinking Charlotte did not understand her heavily accented English.

She became aware that others on the bench had moved away, her anguished face pushing them away, clearing a space for her, a space that held an emotion that these strangers could feel without knowing the details.

“Madame, my husband has drowned; he is dead.” The guard’s arms fell to her sides. She understood, and as if to make her meaning clearer, pointed awkwardly at The Raft of the Medusa. She was to learn later how fully she understood her grief. She meekly walked out of the room with her head bowed as if in prayer.

Charlotte returned to The Raft of the Medusa. The ocean took my Andre. This vast expanse of liquid that we mostly float above. He has sunk below to a realm no longer within reach of my love. The finality of death penetrates slowly, especially if there is no body to bear witness to a piercing grief.

She continued to stare at the painting, attempting to extract a meaning that would help her. She was now a survivor like those on the raft who had spent thirteen days at sea. The very number of days she had been absent from Andre, who is now absent from her forever.

Why a PPLI Structure Is Best

The laws governing these PPLI contracts are written specifically to accommodate international wealthy families. These laws enhance not only succession planning, but provide excellent asset protection, privacy, and tax efficiency.

A PPLI policy is not a uniquely civil-or common-law creation. Its treatment in law is more uniform than planning solely with entities like trust, foundations, and LLCs. The unique design of a PPLI policy can greatly assist in a move between civil-and common-law jurisdictions.

This can be done without the requirement of a will or trust. Upon death of the insured person(s), the value of the PPLI policy plus any death benefit is paid directly to the beneficiaries listed in the policy, and separate from probate.

If a PPLI policy is held by an entity, such as a trust, that is compliant in the beneficiary’s country of residence, tax deferral and investment flexibility can still be preserved, even if the trust is disregarded as a foreign entity.

Gift and estate planning for life policies frequently involves establishment of a specially structured insurance trust for the benefit of a spouse and/or children and descendants. The trust acquires the policy with the premiums being contributed to the trust by the settlor/insured. In this manner, the death benefit would be paid to the trust free of estate taxes rather than going outright to the surviving family members after the payment of estate taxes.

PPLI policies also could invest in PFICs without creating adverse tax consequences. From a US perspective, US persons should generally be aware that most non-US collective investment vehicles will be classified as PFICs for US purposes and subject to adverse tax charges upon generating income and gains.

Part 3

Edward Lawson had a mathematical mind. Looking out his New York Park Avenue office window onto the neatly arranged winter bedding plants, he spotted the red and green variegated ornamental cabbage peaking through the snow; seen from his tenth story window, they reminded him of little zeros.

He was taking a secret pleasure in the number and timing of the phone calls he was receiving of people soliciting a share of Andre Simmons estate. It was averaging one call every fifteen minutes. As Andre’s attorney for many years, Edward had assumed the role of executor of his estate, although it would probably take years to find out who the final executor might be. He had the relaxed air of someone who knew his difficult task was not permanent, and does not bear full responsibility for the outcome.

His job was to gather together the loose threads of Andre’s substantial financial empire. He thankfully did not have to be accountable to the many beneficiaries, many of whom would be discredited and found to have false claims against the estate by whatever court would have the ultimate authority for the case.

He knew a call was due, and here it came. “Edward Lawson.”

“Edward, I have Herve Laurent, a french attorney for you. Shall I put him through?”

“OK, Nancy.”

“Mr. Lawson, I represent Bernadette Simmons, Andre Simmons’ first wife. I wish to make my client’s situation known to you. She says she has proof that Mr. Simmons was married to his second wife in New York before his French divorce with my client was finalized, therefore, under French succession law, she has rights to a portion of his estate, as well as her two children. They will be represented each by their own legal counsels.”

In the two weeks, he had been handling this case, startling developments were routine. “Thank you Mr. Laurent. I will put you into the case. No guarantees that I can keep you informed, so please check back as things progress.”

Turning to his computer, he noted this in the file, and reflected that if France was to adjudicate the estate, and nullify the second marriage to Charlotte, this indeed would be a new development, but it was much too early to speculate.

It was time to summarize the entire situation, in case the managing partner asked him about the case. This is how it stood presently just a month after Andre’s death:

  • Andre has over a dozen business entities in multiple countries that must be sorted out. In these countries there are other partners and directors who will have conflicting claims concerning the ownership and continued operation of these companies.
  • Even though Andre Simmons is a U.S. citizen and taxpayer, New Zealand and France could claim taxes from him because he had residences there, and spent considerable time in these countries. He had extensive economic ties to all three countries with a large sheep farm in New Zealand, vineyards in France, and real estate in New York City. All three countries will make arguments that his center of economic activity or permanent place of adobe occurred in their country, although it is possible to be declared a tax resident in more than one country.
  • The U.S., France, and New Zealand have double taxation treaties with each other, and tie breaker provisions in case of conflict, but it will be far from simple to come to a decision.
  • As to future potential beneficiaries through blood dies, if past cases are any indication, they will be appearing daily. The various courts involved will be asking all these unsubstantiated beneficiaries to take DNA tests to prove a biological connection to Andre.
  • The allegation concerning the timing of his divorce to the first wife, and remarriage to Charlotte must be thoroughly investigated.

“Zero times any number equals zero,” Edward said aloud to himself. Zero was the image that came to mind at his conclusion of the summary. What a disgraceful waste of legal brain power and money. This case has the potential of another Bleak House. (The novel by Charles Dickens that depicted an epic estate contest that ended in all the estate being consumed by legal fees.) Of course, all this could have been avoided with proper planning, but now each new complexity would add months if not years to the process, and drain the estate value substantially.

Edward thought drowning the estate sounded better, but remembered Andre’s death, and forced himself back to his computer screen.

Unwelcomed Complexities by Country

The laws of succession and inheritance vary widely by country. By reviewing the laws of France, China, Russia, and Saudi Arabia, we give you a sampling of the complications faced by wealthy international families throughout the world. Image a family that might have family members and assets in several of these countries, and the daunting task of settling their estate. If a properly structured PPLI policy is used, many of these complications can be avoided.

France

Before the Napoleonic Code, France did not have a single set of laws; law consisted mainly of local customs, which had sometimes been officially compiled in “custumals” (coutumes), notably the Custom of Paris. There were also exemptions, privileges, and special charters granted by the kings or other feudal lords. During the Revolution, the last vestiges of feudalism were abolished.

France’s Napoleonic code dictates how your assets must be distributed on your death. The key points are:

  • For French residents, succession law applies to worldwide assets (excluding real estate outside France).
  • For non-residents, French real estate is subject to the succession law rules.
  • Assets do not automatically pass in accordance with your will.
  • Children are protected heirs, inheriting up to 75% of your estate.
  • Spouses are not automatically protected.
  • You can use the EU succession regulations, termed Brussels IV, to opt for the succession law of your nationality instead of French law.

Brussels IV has been in place since August 17, 2015. Its intention was to simplify issues relating to succession across the EU. The objective of Brussels IV is to ensure that only one country’s laws apply to the deceased’s estate. The laws of the country in which a person is habitually resident at their death will apply to them, unless they have made a declaration during their lifetime.

Brussels IV gives residents in EU countries (with the exception of the UK, Denmark and Ireland) a single set of rules which govern the jurisdiction and applicable law in succession law matters. The new rules look primarily to the deceased’s place of habitual residence, but an individual may elect that his succession should be governed by the law of his nationality (whether or not he is a national of an EU member state). The new rules also introduced a European Certificate of Succession, aimed at facilitating the administration of cross-border estates.

China

Unlike common law countries, China possesses few legal instruments for processing a solid estate plan. But because China does not levy estate or inheritance tax, nor does it collect a gift tax, there is less demand for estate planning, which tends to focus on tax savings. However, family business succession is looming large in China, with many first generation entrepreneurs approaching retirement.

Under Chinese inheritance law, when a valid will is made, it is generally respected. So these estates pass to the beneficiaries designated in the will. When a person dies without having a valid will in place, the estate passes to heirs under the statutory succession rules.

China has a limited forced heirship regime under which dependents of the deceased are entitled to succession to the extent that they otherwise cannot support themselves, for example, those who are unable to work and have no source of income. As such, a family trust may be liable to forced heirship claims against trust assets.

Under the Chinese statutory succession rules, the first half of the estate is distributed to the spouse of the deceased as community property. The rest is distributed to the spouse, the parents and the children of the deceased in equal shares. The limited forced heirship regime cannot be avoided. All the assets, including those received by beneficiaries in other jurisdictions, are taken into account for the forced heirship regime.

For statutory succession purposes, the succession rules of the habitual residence of the deceased at the time of their death will apply, unless the asset is a real estate located in China where the Chinese succession rules will automatically apply. This can be avoided by making a will by the foreign national.

In the absence of a will, Chinese statuary succession rules apply to the deceased’s real estate in China even if the deceased is a foreign national. Chinese laws do not recognize the doctrine of renvoi. By invoking renvoi, the court could rule that the law of another country would be the most appropriate law to apply in this case.

There are no other taxes on death or lifetime gifts, unless the gifts would be deemed as a transfer of assets, for example, gifts of shares or real estate between non-family members, in which case the individual income tax on deemed gains will be imposed on the transferor.

Russia

Russian inheritance laws cover everyone who is domiciled (i.e., has his or her usual place of living, but not necessarily his or her nationality) in the Russian Federation, and also covers everyone including foreigners who own property in the Russian Federation.

Minor and disabled children of any deceased person domiciled in Russia, disabled spouse and parents, and any disabled dependants of the deceased must inherit at least one-half of the share each of them is entitled to inherit by law, irrespective of any testamentary provisions.

There are two types of inheritance: testamentary inheritance (when there is a will of a deceased) and intestate inheritance (in the absence of a will of a deceased and in other statutory cases). The deceased’s estate incorporates the items and other property the deceased owned as of the date of the opening of the inheritance, including property rights and liabilities. Rights and liabilities inseparable from the personality of the deceased (e.g., rights to alimony), personal incorporeal rights and other intangible assets are not included in the estate.

If no provisions are made in prospect of death, a complex statutory order of intestate inheritance is applied to all persons covered by Russian inheritance law. The heirs-in-law (individuals only) include children of the deceased, his or her spouse and parents, brothers and sisters, other relatives and disabled dependants of the deceased.

The tax on the assets transferred through inheritance or donation that previously existed, was abolished effective January 2006. Alongside the abolishment of inheritance and gift tax, personal income tax applies in certain instances where individuals receive gifts.

In certain cases, individuals receiving income through inheritance may also be subject to personal income tax as a regular taxable income. There is no inheritance tax in Russia. There is no gift tax in Russia, although in certain cases personal income tax may be levied. There is no real estate transfer tax in Russia, although in certain cases personal income tax may be levied. There is no net wealth tax in Russia.

Russian tax residents are taxable in Russia on their worldwide income, generally, at a 13% tax rate (including, but not limited to, gifts in various forms and inheritance in special cases). For some types of income, such as dividends and material benefit, different tax rates are applied. Russian tax nonresidents are taxable only on their Russian source of income at a 30% tax rate on most types of taxable income (including, but not limited to, income earned in Russia).

There are currently no estate tax treaties between the Russian Federation and other countries.

Saudi Arabia

To understand the basis for Islamic inheritance law, you will need to be familiar with inheritance laws in Arabia pre-Islam. The sole inheritance was given to the asaba (male relatives) of the deceased. The surviving male relatives inherited in order of family position; the son superseded the father, the father superseded the uncles and so on.

Islam has kept the position of the male inheritance principals, but with slight modifications to give women more security. Pre-Islam men inherited, but were not required to care for the females in their families with the inheritance; Islam encourages the opposite. In Islamic Inheritance, the male inherits twice that of the female, but is encouraged to care for the single women in his family from it.

Inheritance between non-Muslims is governed by the will, which has to be registered with the Shariah Court, or witnessed by two adult Muslims. Non-Muslims cannot normally inherit from Muslims and vice versa, but if there is a will which applies to less than 30% of the estate, that portion of the estate can be transmitted across religious lines. There are no inheritance taxes in Saudi Arabia.

Saudi Arabia is governed by Shariah Law, which is a religious law that is based on the Quran and the teachings and practices of the Prophet Mohammed (the Sunna). It was borne out of the Islamic tradition governing all aspects of life. It regulates all of human activity, national and international, public and private, criminal and civil and is applied by courts.

Ultimately, Shariah Law has its own standards in resolving and enforcing sanctions on various cases. As such, in cases of estate settlement, inheritance and wills, certain rules apply. These cases take into consideration the allocation and distribution of shares/properties specified by the defendant or deceased to his family, company and others, following the rules of Shariah Law.

With regard to the law of inheritance, the Quran specifies that fixed portions of the deceased’s estate must be left to the so-called “Quranic heirs”. Generally, female heirs receive half the portion of male heirs. A Sunni Muslim can bequeath a maximum of a third of his property to non-Quranic heirs. The residue is divided between agnatic heirs.

Part 4

In times of grief we turn to family. We might even discover new family members, as we seek to quench the pain of our loss. This was the case with Charlotte Simmons, who found herself again at the Louvre Museum in front of The Raft of the Medusa.

She reflected on the disquiet of her own family who were scrambling to take every advantage they could to divide the family wealth, and receive the most possible for themselves, not unlike those on the raft, who had formed a bizarre family of sorts for their thirteen horrific days at sea together. These reflections did not give her all the relief she sought, but at least gave her a new perspective on her own situation.

She glanced to the side, and saw the same museum guard that had admonished her cell phone use the other day. The museum guard began, speaking rapidly in French, “Madame, I will be brief because I am on duty and need to observe the gallery as I speak. My apologies, I do not wish to intrude, but must tell you something about my life, about our lives. I have read of your loss in the newspapers.” Charlotte was startled, but with a slight nod asked her to continue.

The museum guard nervously told her story, taking in the gallery, and training her soft, kind brown eyes on Charlotte’s exquisite face. The museum guard, Rachelle Allard, was working part-time as a guard at the Louvre while studying at the Sorbonne University for a degree in Classical Literature. Several months ago her husband had been washed ashore in his native Brittany on the northwest shore of France. He had also drowned, in an accident while sailing near his parents’ home. And it turned out that Rachelle was a descendant of Charlotte Picard, the only woman who survived the sinking of the ship, Medusa, the same ship which inspired the painting that hung in front of them.

Charlotte remained silent, her mind spinning to comprehend what this vivacious, intelligent woman was telling her; an utter stranger, yet a new sister of sorts.

“Madame, I see that you wear the same belt that you wore the last time. It is a Versace with their logo, the head of the Medusa.” (Like all classical myths, the Medusa has several aspects: Medusa had the power to turn to stone all those who looked into her eyes, but also had the power to evoke love, which Versace had capitalized on to elicit love for their designs, thus the Medusa embraces both love and death. On the surface contrary aspects, but on a deeper level united with both aspects playing out in the sinking of the French ship, Medusa.)

“This is all so strange; I am not sure what all these connections mean for us, but they are real; as real as the deaths of our husbands, as real as our grief for them, and as real as the solace we can extract from this painting.

Madame, I must now go to another gallery. I hope we might meet again, but, if not, I leave you with my sincere wish for peace and joy in the new life you must create for yourself…for ourselves.” She left as tears began to fall, as tears fell in both their eyes.

What is handed down in families is a mixture of wealth and suffering. The proportions vary according to family circumstances. What the survivors make of this wealth and suffering is the beginning of a new generation, a new series of connections that either unite or oppose, much like love and death.

Conclusion

Wealthy families frequently hold second passports, and have homes in foreign countries. Over time, family events like death, separation, and remarriage complicate estate plans. All of these factors can dissipate family assets.

Life insurance is recognized in almost every country worldwide as a safe, straightforward, and simple wealth transfer vehicle. The use of PPLI only adds to the benefits, since in a properly structured PPLI policy almost any asset can be held.

A PPLI policy passes assets directly to intended beneficiaries and keeps family wealth intact, giving families the maximum amount of privacy, asset protection, and tax efficiency.

If an EWP Structure had been used…

  • In the process of creating an EWP Structure, Andre Simmons’s estate plan would have been thoroughly discussed, and a will would have been part of this process. The orderly deposition of his assets would have been formulated in detail. All bequests would have been spelled out, leaving no doubt as to how his estate would be divided.
  • An EWP Structure would address all possible issues involving succession. A trust would have been established outside of either the U.S., France, and New Zealand making the forced heirship laws of these countries mute on this point.
  • The press would have few details to speculate about involving Andre’s assets, because in an EWP Structure the insurance company becomes the beneficial owner, and these assets are not a part of a public record, such as registers of beneficial ownership.
  • The issue brought by Andre’s first wife would have been discussed in connection to the EWP Structure, so could not have been raised in any attempt to garner assets from the estate through nullifying his second marriage.
  • All Andre’s assets would be included in the EWP Structure, and provisions would have been made for all his companies continued operation or sale in the event of his death.
  • The U.S., France, and New Zealand would not be able to compete to take tax dollars from the estate, because they would have been in an EWP Structure that would place them outside the reach of all three countries.

 

by Michael Malloy, CLU TEP RFC.
CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

EWP Stories-3

Expanded Worldwide Planning
International Tax Planning

Stories
Part 3: Tax Shield

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EWP adds tax deferral, income, estate tax benefits and dynasty tax planning opportunities. Assets held in a life insurance contract are considered tax-deferred in most jurisdictions throughout the world. Likewise, PPLI policies that are properly constructed shield the assets from all taxes. In most cases, upon the death of the insured, benefits are paid as a tax free death benefit.

The best comment made about the tax benefits of PPLI is from the October 1994 article in Offshore Investment by Professor Craig Hampton:

“I was visiting a gentleman at his home in the Piccadilly district of London. It was explained to me that his net worth exceeded $100 millionU.S. by a substantial margin. I noticed the presence of a computer terminal on a large desk in his den. It was surrounded by reams of paper dealing with offshore investing.

It soon became apparent that his affluence was due to his own efforts when he said to me:

“You’re a bright young man who obviously knows his craft. But what can you tell me that I don’t already know about finances?”

I leaned forward and made this simple statement:

“Through the creative use of international life insurance, your financial affairs can be arranged so that you will never have to pay income taxes for the rest of your life!” The gentleman took serious notice, and thus was born the Hampton Freeze.”

The Hampton Freeze is the name coined for the various PPLI designs developed by Professor Craig Hampton in the early 1990s. These designs were utilized in cases where the premium was over $100M, but can also be employed for PPLI policies with lesser amounts of premium.

Oddly enough many of the tax benefits used for the sophisticated designs like the Hampton Freeze utilize the same tax benefits common to all life insurance policies:

  • tax-deferred growth of internal cash value;
  • no capital gains tax;
  • no income tax;
  • ability to access cash value through tax-free loans;
  • tax-free death benefit, if structured properly.

This is why savvy, wealthy families today are employing PPLI in greater and greater numbers. A hallmark of the popularity of this asset structure is its conservative and straightforward nature. This ironically allows it to achieve spectacular tax savings.

Why strain to invent a structure that will very likely draw the attention of tax authorities, because of its convoluted and aggressive design? We counsel you to stop trying to be overly clever in the design of your asset structures. Why not use a financial tool that has been in use since Ancient Rome—life insurance? This will give you the best tax shield available today bar none.

Part 1

George Allbright was skimming over the arid, parched landscape of New Mexico in his Eurocopter Mercedes-Benz EC-145. This stylishly, well-appointed helicopter, costing $7 million dollars, could maneuver effortlessly between the narrow red-rock canyons near his home. But minutes from his home were some of the poorest tribal communities of the Navajo Nation.

Some of these communities have been compared to Third World countries because of their economic struggles and their lack of basic modern water and energy systems. Most of the state’s Pueblo villages, Navajo chapter houses and Apache communities are isolated and have little or no access to the already poor infrastructure in New Mexico.

George’s source of great wealth was also a product of sharp contrasts. He was a non-smoker who founded a chain of stores that sold cheap cigarettes. He was raised in a large city, Detroit, yet now was one of the largest landowners in the U.S. He had used his prodigious capital from the sale of his cheap cigarette stores to purchase ranches across the United States.

George skillfully landed his helicopter on the helipad a short distance from his split-level modern home that was cut out of a cliff overlooking acres of pristine desert landscape. He had no neighbors in sight, and he liked it that way.

After his flight, he sat on his veranda overlooking the silent and serene desert, dotted with creosote and mesquite. He savored his favorite single malt scotch, Laphroaig, with its strong peaty taste.

His cell phone vibrated loudly on the glass table. It was a number he did not recognize.

“Hello,” said George.

“Good afternoon,” said a well educated voice. “Let me get straight to the point. We have not met, but my company, Conservation for Nature, would be interested in working with you. You have plenty of land, and we have the expertise to give you excellent tax breaks.” He went on to detail the large tax deductions they were offering.

“Your timing could not have been better. My accountant has just told me that I need to consider ways to reduce my taxes. I have looked into conservation easements before, but the tax deductions that you propose are much better than I have heard of before. Yes, I would be interested, very interested. Please call me back tomorrow.”

George had had a simple plan in amassing millions of acres of ranch land. He wished to keep it away from developers. This is just what conservation easements accomplished.

He also was feeling guilty about not properly figuring out how he was going to pass on his wealth to his family. If he could pay less in tax, he would have more to pass on to his wife and children. This thought gave him pleasure.

George marveled at his good fortune to receive such an opportune call. Was it too good to be true?

A Brief History of Taxation

We will be concentrating on the ‘shield’ aspect of the tax shield, but before we go into more detail, let us speak briefly about the ‘tax’ aspect of our subject. What is the history of this thing we wish to shield?

In the ancient world there is recorded a system of taxation in Egypt around 3000-2800 BC. Documents show that the Pharaoh would tour his kingdom twice a year to collect taxes. In the Bible, we find this quote,

“But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children,” Genesis (chapter 47, verse 24, the New International Version.)

America was tax-free for much of its early history. This changed at the time of the Civil War, when large debts were incurred to fund the war against the South. In order to help pay for the war, the Congress passed the Revenue Act of 1861. The tax was levied on incomes exceeding $800 and was not rescinded until 1872.

In 1913, the 16th Amendment to the Constitution was introduced to pave the way to an income tax by removing the proportional to population clause. It was quickly followed by an income tax on people with an annual income of over $3,000. This tax touched less than 1% of Americans.

World War I led to three Revenue Acts that cranked up tax rates and lowered the exemption levels. The number of people paying taxes in the U.S. increased to 5%, and separate taxes were introduced for estates and business profits.

By 1940, the need for the U.S. to prepare for war and support its allies led to even more aggressive taxation. People with incomes of $500 faced a 23% tax and the rates climbed up to 94%. The average annual income at this time was $1,000. By 1945 $43 million Americans paid tax and the yearly receipts were in excess of $45 billion, up from $9 billion in 1941.

Who Pays the Most Tax Today?
The most recent IRS data, from 2016, shows that the top 10 percent of income earners pay almost 70 percent of federal income taxes.

Looking at all federal taxes, the Congressional Budget Office shows that the top 1 percent pay an average federal tax rate of 33.3 percent. The data show tax rates decline with income, and the poorest 20 percent of the population pays an average tax rate of just 1.7 percent.

Part 2

Jack Newcastle pursued his position as a lawyer at the IRS’s Global High Wealth Group with zeal. Many of his colleagues would call Jack a zealot. He was an unabashed crusader against abusive tax schemes.

What was not so common knowledge was that his grandfather’s law firm was destroyed for backing one of these abusive tax schemes. Because of this, the life of a rich, successful partner at a major law firm was denied to Jack. Jack sought revenge on those who had robbed him of his prestigious partner position.

Jack was walking down H Street, heading towards the Treasury Building. His mind felt dull, far from the clear, scientific thinking required to succeed on his current audit case. The Baroque grandeur of the city plan of Washington D.C. was lost to him.

Jack was lost in thought about the latest developments at the office. He was part of the Global High Wealth Group audit team that was undertaking an audit of Conservation for Nature, the company that had contacted George about the purchase of his land.

Things were not going well on this audit. The promoters of this syndicated conservation easement scheme were successfully bending the law to their advantage at every turn.

A conservation easement, in its original, legitimate form, is granted when a landowner permanently protects pristine land from development. In that scenario, the public enjoys the benefit of undeveloped land and the taxpayer gets a charitable deduction.

By contrast, these promoters were finding appraisers willing to declare that land parcels purchased by the promoters have huge development value, and thus were worth many times the purchase price. They then were selling stakes in the deal to wealthy investors who extract tax deductions that are often five or more times what they put in.

The Global High Wealth Group was introduced with the aim of stopping just this type of unscrupulous promoters. Unfortunately for the IRS, the Global High Wealth Group was not working as expected: with bureaucratic end-fighting and being woefully underfunded, the initial euphoria at its launching was short lived. They also had experienced no steady leadership with three directors in the past five years.

At the beginning of the audit, the promoters seemed easy targets. But as they progressed with the audit, they realized that they were dealing with more savvy characters.

All this brought Jack to his office in a sour mood.

Jack’s cell phone rang. He did not recognize the number, but answered anyway, “Hello.”

“Jack is that you,” said a strangely familiar voice.
“Yes.”
“This is George.”
“Man, it’s been a while.”

George telephoned Jack because he remembered that he had taken a position at the IRS, and he might know something about Conservation for Nature. After a few minutes of catching up, George asked him about Conservation for Nature, and was told about Jack’s ongoing audit.

They agreed to speak the following day, as Jack had reached the Treasury Building, and needed to go into his office.

George felt the pleasure of connecting with an old friend, but he knew the story of Jack’s grandfather, and how bitter Jack was at having to accept a position at the IRS. Jack gave only negative comments about Conservation for Nature. Could Jack be trusted? Would his advice be tainted by his personal history?

PPLI Benefits U.S. Persons with Real Estate

The benefits of using PPLI for U.S. persons investing in real estate in the U.S. are substantial. Why don’t more U.S. persons take advantage of these benefits? We maintain that it is because of profound misunderstandings about the Investor Control Doctrine and the diversification requirements of variable contracts under IRS code section 817(h).

Ironically, these misunderstandings have been clarified by the Webber decision, Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015). In the popular press, and in many tax journals, this same Webber decision was interpreted as the ‘nail in the coffin’ for PPLI.

Let us explore how the Webber decision makes it clear that in a properly structured PPLI policy, U.S. real estate can be held and still be fully compliant with the IRS. We will do this through the lens of what the Webber decision tells us about the Investor Control Doctrine and the diversification requirements of variable contracts under 817(h).

These are the key points of the Webber decision that support the inclusion of U.S. real estate in a properly designed PPLI policy:

The egregious flaunting of what is known as the Investor Control Doctrine by Jeffrey T. Webber, William Lipkind, his attorney, and the manager of his Insurance Dedicated Fund (IDF) (Butterfield Bank) has blinded advisors and their clients to an essential point in the tax court’s decision. Judge Lauber, the presiding judge, found no objection to the private companies and other investments that were placed as in-kind premium in the two PPLI policies that were in question. There is nothing in the rules regarding PPLI either before or after Webber which would prohibit the use of private company securities, actively operated and closely business interests, and real estate enterprises within a policy IDF or Separately Managed Account (SMA).

The Tax Court’s key issue was the fact that Mr. Webber was on the board of every company in which the policy invested, invested his own funds from his personal wealth and his IRAs, and that he negotiated the terms of every loan on behalf of the company and then gave the instruction to Mr. Lipkind and Butterfield Bank. The court states, “The record includes more than 70,000 emails to or from Mr. Lipkind, Ms. Chang (Webber’s accountant), the IDF Investment Manager, and/or Lighthouse (the insurance company) concerning petitioner’s “recommendations” for investments by the separate accounts. Mr. Lipkind also appears to have given instructions regularly by telephone.”

IRC Sec 817(h) provides a detailed overview of the investment diversification requirements of variable insurance products. The regulations address a wide range of investment alternatives that are not found in retail variable life and annuity products such as direct investment in real estate, and commodities.

Treasury regulations 1.817.5 provide very detailed guidance on the investment diversification rules. The regulations interpret these rules for investment asset classes such as real estate, and allow for a period of time to meet the diversification requirements of IRC Sec 817(h). For non-real estate accounts, the regulations provide for a one-year period to meet the diversification requirements. Real estate accounts provide for a five-year start up period and a two-year liquidation period.

The court states: “The “investor control” doctrine posits that, if the policyholder’s incidents of ownership over those assets become sufficiently capacious and comprehensive, he rather than the insurance company will be deemed to be the true “owner” of those assets for Federal income tax purposes. In that event, a major benefit of the insurance/annuity structure–the deferral or elimination of tax on the “inside buildup”–will be lost, and the investor will be taxed currently on investment income as it is realized.”

It is clear from reading the Webber decision that, if Mr. Webber had followed the very language stated in his policy, his PPLI structure would have worked, and complied with the Investor Control Doctrine and the diversification requirements of 817(h). The court record reads: “As drafted, the Policies state that no one but the Investment Manager may direct investments and deny the policyholder any “right to require Lighthouse to acquire a particular investment” for a separate account. Under the Policies, the policyholder was allowed to transmit “general investment objectives and guidelines” to the Investment Manager, who was supposed to build a portfolio within those parameters.”

Part 3

When Jay Edwards began a land appraisal project, he had a single goal—to produce the highest valuation possible. He had had 30 years to hone his skill of inflating appraisals. When he had done retail appraisals at the height of the refinancing boom in the early part of this century, his services were in high demand.

The promoters at Conservation for Nature, want a high valuation, because that in turn produces a large tax deduction for its investors. On one deal in South Carolina, they had acquired a property of 28 acres for $1M, then raised about $9M from investors who bought the property.

The investors made an easement donation based on a claimed value for what the land would be worth if developed as a multifamily resort. Jay’s appraised projection produced a tax deduction of about $39M. The tax write off for investors: $4.00 for every $1 invested.

Of late, the promoters at Conservation for Nature, were pressing Jay for higher and higher numbers. His increased consumption of cigarettes and alcohol was keeping pace with these higher numbers. A number that was going in the opposite direction were his hours of sound sleep. He could not remember when he had last had a restful night’s sleep.

Jay had become a character in an old joke; the one the Mafia hired. It went like this.

The Mafia needed a new accountant, so they interviewed three people. They asked the first interviewee, “How much is 2 + 2?”

“Four,” he answered.

“Sorry, that’s not right,” said the Mafia boss.

They asked the next candidate, “How much is 2 + 2?”

“Four, of course,” he said.”

“That’s not right,” said the Mafia boss.

They asked the third accountant the same question.

He responded, “What number do you want it to be?”

The Mafia boss said, “You’re hired.”

The joke was now becoming stale. Conservation for Nature was being investigated by the Department of Justice. The Tennessee state real estate appraiser board brought a formal complaint against Jay, after a detailed review of one of his easement appraisals found an inflated valuation riddled with errors and omissions.

Threatened with loss of his Tennessee license, Jay voluntarily surrendered it instead. However, he continued to work for Conservation for Nature in states where the appraiser for a conservation easement was not required to be licensed by the state, and continued to ply his disreputable trade.

PFIC + Subpart F + GILTI = All Redefined with PPLI

Distributions from a properly structured PPLI policy are distributions from a life insurance policy. Like all policies, both U.S. and issued in other jurisdictions around the world, the distributions are subject to the tax code sections that apply to life insurance.

In a properly structured policy, one can withdraw all basis in the policy, which are the premiums paid, tax free, and take very low cost loans to withdraw the remaining funds. The costs of these loans is equivalent to an administrative charge, and is usually in the range of 25 bps. When the policy is held until the death of the insured life, the amount of the loan is merely subtracted from the death benefit, therefore, the loan need not be repaid.

The 2017 Tax Cuts and Jobs Act (TCJA), has brought an increase in taxation for those who have subpart F income. Just like Passive Foreign Investment Company (PFIC) income, subpart F income can be structured inside a PPLI policy, and, therefore, shielded from tax. PPLI has been used for many years to shield PFIC income.

TCJA gave us a new section of the tax code, Section 951A. For those who have an interest in a controlled foreign (CFC), particularly if they are not C corporation shareholders, there is a new opportunity to use a PPLI structure to shield this income from tax. Section 951A gives us Global Intangible Low-taxed Income (GILTI), which if held in other than a C corporation, has very unfavorable tax consequences that can be greatly mitigated by using PPLI.

Hedge Fund Life Insurance
One distinct benefit of a PPLI policy is the ability to place tax inefficient investments like hedge funds into a tax-friendly environment. Some advisors have even coined the term, Hedge Fund Life Insurance, to highlight the advantages of combining hedge fund investments and life insurance into one tax-advantaged asset structure.

The numbers tell an excellent story in the chart below.

PPLI TAX BENEFITS VS. FEES AND EXPENSES
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The chart compares a taxable investment to one held in a PPLI account over the long-term. The very clear winner is the PPLI account. Even over a ten year period there is more than $3M more in the PPLI account. The chart does not even show the death benefit which is always more than the cash value account. In a properly structured policy, the death benefit is also tax-free, making a PPLI asset structure the undeniable victory in the quest for tax efficiency.

Part 4

George had spent the last evening researching conservation easements, and concluded that they were a good thing. He had also reviewed his tax situation, and realized that the tax deductions that they offered would reduce his tax bill significantly. Perhaps he should work with Conservation for Nature. He had plenty of land, and they had the years of experience. A good combination, he thought.

Later in the morning, Jack telephoned. He spent nearly an hour telling George that the promoters at Conservation for Nature were crooks, and that George should definitely stay clear of them.

Now George was perplexed. He trusted Jack; they had been good friends ever since their time in Detroit. Jack was giving him very concrete reasons why he should not do business with this company. He decided to reevaluate.

A few minutes after his call with Jack, his cell phone buzzed noisily on the glass table in front of him. He jumped up suddenly. He had survived serving in Afghanistan, that is where he learned to fly a helicopter, but loud, sudden noises were still a problem for him.

“Hello, George,”
“Yes?” George said in a wary tone.
“I am calling you back from Conservation for Nature.”

The voice was no longer polished and sophisticated. The caller was drunk, and he knew who it was. An old college friend of his, they used to go out drinking together. Jay could barely articulate his words. Odd that he could now recognize the voice.

He knew Jay well. Jay still owed him money. Jay was the kind of guy who would sleep with his best friend’s wife.

Jay was desperately trying to launch into his well rehearsed sales pitch about the company he was working for—Conservation for Nature, but was hardly intelligible. That was enough for George.

“Good bye, Jay. Please don’t ever call me again.”

The Tax Savings Are Very Significant

Let us summarize the tax advantages of holding investments in a PPLI asset structure:

Tax-deferred “inside build-up” of policy cash values. The industry has preserved the tax preferred treatment of life insurance for decades.

Non-recognition of capital gains. The policyholder has the ability to switch investment options within the product without triggering taxation. Life insurance separate accounts are legally the owners of the investments within variable insurance products. The life insurer receives a reserve deduction equal to its investment income.

The policy’s basis is its cumulative premiums. Once the policyholder has recovered his basis in the contract, the policyholder has a contractual right to a policy loan which allows the policyholder to borrow up to ninety percent of the policy cash value. Policy loans with a net cost of approximately 25 basis points per annum also receive income tax-free treatment. The policy loan is subtracted from the policy’s death benefit, so it never has to be paid back.

Income tax-free death benefit. The policy cash value grows on a tax-free basis. The policyholder can access investment gains within the policy on a tax-free basis during lifetime, and beneficiaries receive the death benefit income-tax free.

Estate tax-free death benefits through the use of third party ownership of the policy, such as an irrevocable life insurance trust (“ILIT”). IRC Sec 2042 provides that as long as the insured does not retain any incidents of ownership within the policy, the death proceeds will not be included in the taxable estate of the decedent.

PPLI Benefits Non-U.S. Persons with Real Estate

There are many obstacles that non-U.S. persons face in investing in U.S. real estate. The primary tax impediments to foreign investment in U.S. real estate in general and in real estate funds specifically are U.S. income, capital gains and withholding taxes. Adding PPLI in combination with trusts and LLC elements eliminates or mitigates these taxes.

Here is a list of the obstacles faced by non-U.S. persons investing in U.S. real estate:

Effectively Connected Income (ECI): Although non-U.S. investors’ gains from U.S. stock are generally not taxable, income and gain from their real estate investments are generally taxable under the ECI rules. Specifically, rental income and/or gains from the sale of U.S. real estate are both generally treated as ECI. U.S. source rental income allocable to a foreign investor is typically not entitled to any treaty preferences. ECI is generally taxed to such foreign investors under the same tax rates that apply to U.S. taxpayers, and foreign investors that receive ECI are required to file U.S. federal and state income tax returns. Finally, the the Foreign Investment in Real Property Tax Act (FIRPTA) rules described below can also transform sales of stock (or other equity interests), and/or capital gain dividends from REITs into ECI.

FIRPTA: Enacted in 1980 to combat perceived unfair advantages for foreign investors in U.S. real estate, FIRPTA imposes significant taxes on dispositions of U.S. real property interests. Specifically, Section 897 of the Internal Revenue Code of 1986, as amended, essentially treats such gain as ECI. In addition, complicated withholding tax rules apply with regard to U.S. counterparties in such transactions.

Non-US Regulatory Concerns: In addition to U.S. tax issues, non-U.S. investors can have non-U.S. tax and regulatory concerns. For example, non-U.S. investors may need to comply with certain informational reporting requirements in their home jurisdictions.

Significant investment capital for U.S. real estate transactions and funds has been and will continue to be raised from non-U.S. investors. In light of this fact, it is important that real estate advisors, investors, and owners understand the tax challenges, as well as the potential solutions, involved when non-U.S. investors invest in U.S. real estate. PPLI is an integral element in these solutions.

Part 5

George sought the solace of flight. He needed to sort things out.

Lifting off his helicopter into the desert at sunrise in the relatively cool of the morning, he knew answers would come to him. Not through pressing, but by letting go of the questions, so the answers would appear without effort. This was his time-honored method of solving problems.

His own desert property was about 5,000 acres, adjacent to the Navajo Nation that was 17.5 million acres. He only wished that geographic size mattered for the Navajos. That they had been given what they deserved for their land.

A certainty gripped him as he sped low atop a treeless mesa where the bottom would unexpectedly drop out from under him to reveal a spectacular panorama below. He enjoyed this jolt, like what you feel on a roller coaster ride when you descend without warning from a long slow ascent.

A few minutes on the phone with Jay did what all Jack’s well reasoned arguments could not do. If Jay worked for Conservation for Nature, it was not a company he would do business with.

Yes, he could use a tax deduction, but not one that would land him in trouble with the government. George wished a structure that was simple and straightforward like himself. Where would find such a structure? He did not know, but the search would now begin.

He was satisfied. George had learned to live with contradictions and not let them bring him down. These internal struggles could produce something higher, if you handled them properly. His life was a testament to this proper handling. “Keep your eye on the answer, not the problem,” he told himself with a smile.

Outstanding Results Realized

We will compare the various structures generally used by non-U.S. persons for investing in U.S. real estate with the addition of PPLI. Adding the PPLI advantage is a cost-effective way to give clients additional return on their investments and legitimate, enhanced privacy in their structures.

An insurance solution using PPLI or a Private Placement Variable Annuity (PPVA) contract can greatly simplify or eliminate many of these issues and make long term investing even more appealing.

All foreign Investors are exposed to a myriad of US tax consequences, including withholding taxes (30%), capital gains, and even U.S. Estate Taxes. Life insurance, and specifically PPLI, is a well-established tax and estate planning tool that many qualified investors utilize to mitigate and manage these exposures.

Most structures can remain intact with the simple addition of a compliant life or annuity policy. PPLI can accommodate most custodians, managers or funds, making the transaction as simple to set up as a trust.

PPLI also provides simplified reporting and confidentiality. The policy is reported once, and not the assets held or underlying investments. The owner reports a life policy, and not that they are investors or hold assets in the U.S.

The Summary Chart below compares using PPLI with other commonly used structures. The small additional expense of adding PPLI to a structure gives the non-U.S. person many additional benefits that cannot be achieved otherwise.

PPLI with IDF vs. Other Real Estate Structures
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If an EWP Structure had been used….

If an EWP Structure had been used, these salient features would have been of great benefit to George.

  • An EWP Structure is a holistic tax shield. Once assets are placed in an EWP Structure, they are exempt from income tax and capital gains tax. No need to seek out patently fallacious tax deductions like those offered by Conservation for Nature.
  • If George had had his chain of cigarette stores in an EWP Structure, he would have paid no capital gains tax when he sold it. As it were, he paid tens of millions in tax.
  • When George began purchasing ranches, these purchases could have been made inside his EWP Structure with the funds he received from his cigarette stores. Each of these ranches would become a separate investment inside his Structure. He could buy and sell ranches inside the Structure with no tax consequences.
  • Upon George’s death, all the ranches would pass tax-free to his heirs in a properly designed Structure. All appreciation in the ranches would pass tax-free to his heirs. There is currently a provision for a step-up in basis at the death of the owner of real estate in the tax code, but this can be easily taken away with a change of administration in Washington D.C. At this present time, it is rumored to be under consideration for removal from the tax code.

Please Contact Us for any questions you may have.

by Michael Malloy, CLU TEP RFC.

CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

EWP Stories-2

Expanded Worldwide Planning
International Tax Planning

Stories
Part 2: Asset Protection

 

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Our asset protection model is called The EWP Da Vinci Code. Our model is highly effective, yet conservative, and offers more asset protection than the recently invented options available to wealthy families. In today’s world of financial transparency, there is no hiding of financial assets. The EWP Da Vinci Code brings you peace of mind through a long-established and secure financial structure—life insurance, in the form of PPLI. We will share more with you on The EWP Da Vinci Code later in this Chapter.

Asset Protection is a prudent subset of financial planning. As we will read later in this article, some consider asset protection a deceptive, sleight-of-hand trick that deprives creditors from receiving what is lawfully due to them. The law is a double-edged sword that cuts both ways. Our article deals with both sides of this sharp blade.

We take an expansive approach to asset protection, which produces a simple and straightforward solution to this drama? What is the drama you correctly ask?

We will call our drama the EWP Drama since this is, in a sense, our main character. Our sub-plots in this drama are:

  • One Side of the Sharp Blade vs. the Other Side of the Sharp Blade
  • Hunters vs. Prey
  • Creditors vs. Debtors
  • Domestic Asset Protection Trust vs. Offshore Asset Protection Trust

Our theme of opposites is aptly expressed by the opening lines of A Tale of Two Cities by Charles Dickens. These profoundly simple lines express the hopes and fears of all ages:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way….”

Why call it a drama? Our clients come to us to implement the six principles of EWP by incorporating PPLI into their asset structures. Our wealthy clients have achieved this great wealth for the most part through hard work, intelligence, and some element of being in the right place at the right time. They wish to be good stewards of this wealth, and pass it onto future generations, but encounter various antagonists. Hence, a drama unfolds.

Part 1

Steve waited impatiently in the long line at Starbucks. He still needed groceries to cook dinner for his girlfriend, but needed a coffee. Steve was in his last year of residency at Mt. Sinai Hospital in New York City. The long hours at the hospital under the close scrutiny of his attending physician were wearing him down. Steve was equally impatient to finish his residency, and begin his practice.

With his straight A’s through medical school, and a remarkably deft hand with medical instruments, his new career as a heart surgeon looked more than promising. Steve was a man poised for success.

Steve made quick work of shopping at Whole Foods, then, proceeded to a wine shop. It was a chain that sold well-selected bottles from around the world at a fair price. He entered by a side door.

A clerk at the wine shop, had just finished cleaning up a large pile of dog poop on the street outside the door. He had entered just before Steve with his mop trailing behind him, not realizing that it was leaving a stream of water in his wake.

Steve entered the wine shop. “My God,” he gasped loudly.

As his right foot touched the slippery surface of the watery stone flooring, it slid. He tried to steady himself, flailing his arms and attempting to stop his forward momentum with his left foot. There was now no way to regain control. Both legs shot out from under him, and he landed hard, directly on his lower spine, and then hit his head on the hard floor.

“Crack,” it sounded.

The customers nearby winced in an automatic sympathetic response, even before they turned their heads to see what had happened.

Steve lay sprawled on the hard, cold stone floor with blood flowing from his skull. The store manager jostled several customers in his attempt to reach Steve.

As he saw his customer unconscious, he immediately took out his cell phone and called 911.

Both Sides of the Sharp Blade

What we term the Sharp Blade is our legal system, particularly in the U.S. According to One Legal, it is estimated that there are more than 40 million lawsuits filed in the U.S. every year.

For better or worse, the legal system is adversarial. If you are sued you must defend yourself or risk losing the lawsuit by inaction. Both sides present their best case and a judge or jury decides what shall be done with the issue, or the parties negotiate a settlement between themselves before the case goes to trial.

If you are a professional person or own a business, you are at risk of being sued, and it behooves you to protect yourself. Different types of insurance can mitigate the risk for you, but not for all situations. If insurance does not come to your rescue, then, your assets are exposed to being seized and sold to pay a judgement against you.

Wealthy families, who may be immigrating from a country like China that is not nearly so litigious, may not even consider this possible threat to their assets. EWP, through the proper implementation of a PPLI policy, offers asset protection by its very nature. Not as a separate complicated trust structure, but because life insurance has a very favored position in the eyes of the law in respect to asset protection. This will be explained in more detail in other sections of our drama.

Hunters vs. Prey

Watch a nature documentary and you will see this sub-plot of the EWP Drama unfold. Frequently, the strong and fast feast on the weak and slow, but not always. Nature has a stealthy way of protecting the weak and slow. You might call this method camouflage or hiding in plain sight. Instead of trying to run away from predators, or overpower them, they quietly remain in the same place. This method of hiding in plain sight is how life insurance achieves its excellent asset protection.

Some asset classes are favored by law. These asset classes provide the debtor with a greater level of protection from the claims of creditors than would other asset classes. This is so for life insurance, because it is considered essential for the debtor’s family to maintain at least a minimum level of well-being, and not become a burden to the state.

The federal bankruptcy exemption for life insurance policy unmatured death benefit is quite small, currently only $12,500. Many states provide a more extensive exemption for life insurance than federal law. The states vary widely in whether they exempt only the beneficiaries of the life insurance contract, family members of the insured, or the owner of the contract. There is also a wide disparity on the protection of the cash value, if any, inside the contract of life insurance. This protection also differs as to whether the exemption is applied in a bankruptcy context or a non-bankruptcy context.

As we have read life insurance’s role as a protector of assets is quite different from our nature documentary example of a hunter and its prey. Life insurance performs so well in this role because society at large, in the form of governments throughout the world, have cast it in this starring role.

Part 2

Janice felt on top of the world in more ways than one. She was now looking at the Swiss Alps on her balcony in Spiez on the southern shore of Lake Thun. Janice was also completing the sale of her wine store chain. She would be receiving $100M for her twenty years work. She began the chain with a keen enthusiasm for wine, a small inheritance from her uncle, and a rat infested storefront on the Bowery in New York City.

Through careful sourcing of wines throughout the world, her excellent palate, and buyers hungry for good quality wine at a reasonable price, she had grown her one store into a multi-city chain. She was relaxing, as though for the first time in twenty years. Her taunt athletic frame was not built for relaxation. When she would allow herself time away from her business, relaxation took for the form of Triathlons. She did allow herself the time to stay in top physical condition.

The jet streaking above the Alps reminded her of her jet fighter flight several days ago. The ad read: “Fly a Real Fighter Jet. Be a fighter pilot for a day.” When she saw the ad, she couldn’t resist. To pay $5,000 for 30 minutes with an experienced ex-military, fighter pilot, she had to do it, and she did, exhilarated to the core every minute of the flight. She was transported to a new world, as the pilot navigated the high and jagged peaks of the Alps with its narrow valleys and tightly constricted airspace. She did not want the flight to end.

Her cell phone rang. She glanced at her phone. It was her attorney.

“Janice, I have unwelcome news for you.”

“Yes, Brian, what is it?”

“There has been a serious accident at a store in New York City.”

“Well, don’t we have insurance for this.”

Brian said weakly, “Maybe.”

“Why maybe? Don’t we now have our captive insurance?”

Brian said in a dull tone, “We need to talk.”

Creditors vs. Debtors

Historically trusts were employed to shield assets from excessive taxation, unreasonable claims of creditors, and bankruptcy. Trusts were developed in England originally to minimize the impact of inheritance taxes arising from transfers at death. The essence of the trust was to separate “legal” title, which was given to someone to hold as “trustee”, from “equitable title”, which was to be retained by the trust beneficiaries.

In both Roman times and as early as the 14th century in England, the use of trusts to shield lawful claims of creditors was recognized as a practice not conducive to sound public practice. Today we called it fraudulent conveyance.

The Romans utilized a type of trust known as a fideicommissum, which facilitated the transfer of assets at death. The Romans were also aware of the abuses of trust that went against public policy. Their great legal scholars Ulpian and Gaius developed the basic framework for the fraudulent conveyance laws as we know them today.

In England in the late 14th century, two laws were enacted that aimed to end popular types of fraudulent conveyance that were then in practice. One law sought to prevent debtors from conveying their lands to their friends until their creditors had come and gone away. Another law sought to end the practice of temporarily conveying their lands to “Lords and other great Men of the Realm” so as to deter creditors.

Another key component to our own asset protection laws are spendthrift clauses. A spendthrift provision creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her.

These spendthrift provisions first became popular in the U.S. in the 19th century, and were controversial. Not just a few commentators thought that spendthrift clauses were a very bad idea. John Chipman Gray, a Harvard Law Professor whose half-brother (Horace Gray) was a U.S. Supreme Court Justice, registered his objections this way:

“The general introduction of spendthrift trusts would be to form a privileged class, who could indulge in every speculation, could practice every fraud, and, provided they kept on the safe side of the criminal law, could yet roll in wealth. They would be an aristocracy, though certainly the most contemptible aristocracy with which a country was ever cursed.”

Notwithstanding such objections, the spendthrift trust, of course, survived and thrived in U.S. law.
Yet, such trusts had their limitations; for example, some states carved out exceptions for creditors holding judgments for unpaid alimony and child support. By far the biggest restriction was against spendthrift trusts which were self-settled trusts. That great commentator on trust law, George T. Bogert, firmly believed that the spendthrift provisions of self-settled trusts were unenforceable against public policy, and wrote:

“To hold otherwise would be to give unexampled opportunity to unscrupulous persons to shelter their property before engaging in speculative business enterprises, to mislead creditors into thinking that the settlor still owned the property since he appeared to be receiving its income, and thereby work a gross fraud on creditors who might place reliance on the former prosperity and financial stability of the debtor.”

In the late 1980s in the U.S. most legal practitioners were in agreement that spendthrift clauses could protect the rights of beneficiaries of trust, but you could not create a trust that exempted your assets from creditors, a self-settled spendthrift trust.

This leads us to our last segment of our EWP Drama or play of opposites.

Part 3

The gleaming, antiseptic surfaces in combination with the glare of the fluorescent lights gave Brian a sharp inner chill. Not the chill of cold on his body, but an aching chill in the pit of his stomach. He was about to face the unintended victim who might be the cause of his client’s demise, and his own firing from a lucrative client of his firm.

Several years ago under Brian’s direction, he had helped establish a captive insurance company for Janice. This self-insurance vehicle both saved premium dollars on their current policies, and reduced the company’s taxes. It was a smart decision at the time.

He now realized he had poorly monitored the captive insurer, giving responsibility over to the captive manager. Under the manager’s advice they had established the captive in a state that had minimum capital requirements, and funded the company with minimum surplus requirements. The company’s ability to pay a liability claim for Steve’s fall was wholly inadequate.

Because the captive had been established, Brian advised that they cancel their General Liability and Excess Liability insurance policies. To make matters worse, there was also scant legal defense to mount for the negligent behavior of the store clerk.

Where were the funds to pay for this horrific accident? How would Janice react when he told her that the $100M buyout money would have to be used? He did not want to be anywhere near her when she found out.

Brian’s leather-soled shoes slide at each step along the highly polished floor. He had been directed to a special unit of the hospital, a section that housed patients who needed extreme monitoring after leaving the ICU. Steve was diagnosed with severe traumatic brain injury (TBI), and was in a coma.

On both sides of the hospital bed were the machines that told doctors and nurses that Steve was alive. Digital displays and electronic beeps that would erupt into loud piercing alarms, if his vital signs went wrong. What was now Steve seemed like a frail, foreign object amidst this array of electronic equipment. A very slight rise and fall of the bed cover gave evidence of life.

TBI victims go through definite stages: coma, vegetative stage, minimally conscious state, and post-traumatic confusional state. They might not progress at all from one stage to the next. Each patient was different. Steve might never emerge from the coma, be impaired, or be severely impaired.

Brian had seen enough. It was now time to prepare himself to be fired, and be further away from becoming a partner at his firm. He had hoped to achieve this in the next year, now that was definitely out of the question.

As he turned out of the hallway to the main entrance of the hospital, he thought he saw an older couple and a tearful younger one entering Steve’s room. Most probably they were his parents and his girlfriend. Meeting them would have been beyond his current emotional state. He had royally messed up. At least he accepted responsibility, and did not try to blame others. There was no one else to blame.

Domestic Asset Protection Trust vs. Offshore Asset Protection Trust

Advisors debate which is better: a Domestic Asset Protection Trust (DAPT) or an Offshore Asset Protection Trust (OAPT). We say that they do serve a purpose for some clients, but why not adopt The EWP Da Vinci Code, and receive not only outstanding asset protection benefits, but all the six principles of EWP in one complete package?

Why bring Leonardo da Vince into this discussion? Because Leonardo said, “Simplicity is ultimate sophistication.” We have taken this as our model in implementing EWP in our PPLI asset structures. We invite you to do the same.

When you purchase an automobile, you do not ask if it has turn signals. Of course, this is a standard part of the vehicle. Today you may pay extra for an advanced guidance system (GPS), but you might be able to do without it. Asset protection does not come as an extra feature with EWP, it is part of the package, just like turn signals on a new vehicle.

As we will read, the controversial aspects of DAPTs and OAPTs arise out of public policy issues: is the use of this particular trust the best for the common good.

It is not our place to take a position on public policy issues. Our role is to assist wealthy families in their quest to implement the six principles of EWP. Asset Protection is one of these six principles, and it is achieved through the financial planning tool of life insurance.

Life insurance is considered a societal benefit. Life insurance relieves governments from providing families with the needed cash at the death of the family’s income earner. Life insurance encourages savings for retirement through the accumulation of the cash value in the policy. PPLI is a form of life insurance, and thus bypasses much of the attention that is focused on trust structures.

In terms of the actual PPLI contract, all investments are held in separate accounts in the policy, thus, they are not in the insurance company’s general account. For this reason they are not subject to the creditors of the insurance company, if the company were to become bankrupt.

When government regulators look to curb what they would term abuses of public policy: in other words, wealthy families who have gone too far in stretching tax and trust law, aggressive trust structures are a frequent target.

We now give you a brief history of DAPTs and OAPTs, and the public policy issues that raise concerns with government regulators.

According to Wikipedia: “An asset-protection trust is any form of trust which provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.”

What we might call the modern asset protection trust was formulated in the late 1980s, and the first jurisdiction to adopt it was in the Cook Islands. These trusts had spendthrift provisions and could be self-settled. These OAPTs had a one year fraudulent conveyance statute.

The Cook Islands legislation was soon followed by similar laws in the Cayman Islands, Belize, Nevis, the Channel Islands, the Isle of Man, and numerous other international financial centers.

In 1997, Alaska passed legislation allowing for irrevocable, discretionary, self-settled trusts. Ninety days later, Delaware followed suit, and as of this date some 16 states have passed DAPT legislation.

The controversy surrounding DAPTs and OAPTs arises from the degree to which OAPTs, in practice, often defeat deep-seated precepts of U.S. trust law. A key precept is that one ought not control and benefit from property and at the same time shield it from one’s creditors.

The underlying policy rationale for the non-enforcement of self-settled spendthrift trusts is clearly stated in A. Scott’s The Law of Trusts: “It is immaterial that in creating the trust, the settlor did not intend to defraud his creditors. It is immaterial that he was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.”

For a U.S. wealthy family to form a DAPT, it is not necessary to form a trust in a jurisdiction outside the U.S., so this can make the process less expensive and time consuming. This takes us back to the old adage: “you get what you pay for.”

The greatest deficiency of DAPTs is that they are necessarily governed by U.S. law. The DAPT fails to achieve the jurisdictional separation required to fully protect the asset.

Since only a quarter of states currently have DAPT statutes, it is probable that states where litigation is taking place are those in which DAPTs are expressly prohibited as being against public policy. In a conflict-of-law analysis, it is difficult to envision any judge in a non-DAPT state agreeing to apply the laws of the DAPT state.

OAPTs are more secure for several reasons:

  • A foreign trust is not subject to the jurisdiction of the U.S. courts, so a U.S. attachment order will have no effect within that foreign jurisdiction;
  • Furthermore, creditors seeking to reach the assets embark on independent legal proceedings in the foreign jurisdiction in which the trust is located;
  • Even a favorable foreign judgment may be a hollow victory. The creditor still may not be able to satisfy that judgment from the assets held in the trust unless she proves that the transfer to the trust constituted a fraudulent conveyance.
Part 4

Janice saw the huge, fluttering flags outside the Four Seasons Hotel a block away as she walked west down 57th Street in New York City. She was going to meet Brian. It would be his last billable time meeting with her. Janice did not like letting advisors go, but in their last phone call Brian had almost fired himself. He did not condone his shotty legal work or excuse himself in any way. In a sense, this made it more difficult to let him go. She thought him a rare gentleman.

The bar nearest to the lobby was being remodeled, so they had to meet in the one to the rear of the check-in counter. She did not like the dark lighting, but thought the high mirror that reflected the myriad bottles of liquor a good design. It multiplied the bottles, which is just what she needed. An unknown factor to multiple her funds to pay for the future legal settlement resulting from the accident at her store.

To prepare for this meeting with Brian, she had researched the likely worst case settlement for the accident. Her online research revealed she could be responsible for Steve’s future earnings as a heart surgeon, medical expenses, plus a pain and suffering award. She quickly learned her $100M was at all at risk.

After small talk about her trip to Switzerland, Brian mentioned that she could have done some planning specifically for asset protection that might have protected her $100M settlement. She remembers Bian mentioning this in the past, but was so focused on growing her business, she always told him to bring it up some time later.

Since returning from Switzerland, she had alternated between anger at her plight and admonishing herself for engaging in ‘what ifs.’ Had the final papers for the sale of her business been concluded, her store accident would have been the new owners problem. Accidents rarely occur at the right time. The final signing occurred two weeks after the accident.

She purposely wore low heels today, so she could walk in Central Park after her meeting. She knew Central Park well and headed to North Wood, one of the most wild and untamed parts of this magnificent tribute to landscape architecture. Walking in the North Wood, Janice recalled her favorite hero in literature, Frodo Baggins of J. R. R. Tolkien’s Lord of the Rings.

Physically Frodo presented quite a contrast to this tall, slender athletic lady in her early 50s, but she reflected on the spirit of this short, squat, hairy footed creature—one of fierce determination to see a job through to the end, no matter what the cost to himself.

So what was Janice’s plan for the future?

With the uncertainty of the looming lawsuit over the accident, and at least a large portion of her $100M at risk to pay for it, she formulated the beginning of a plan.

From her triathlon experiences, she was acquainted with the world of cycling, and the small bike shops where riders purchased their bikes and accessories. She knew that these bike shops were mostly small mom and pap type operations, and they missed out on the buying power of a large organization. With her wine shops she had built a large, well-run enterprise. Why not for bike shops? A nationwide chain?

It was a beginning. But she vowed to protect her newly hatched idea with an asset protection plan that would fully protect her. This definitely had to be part of her grand plan.

She emerged from the west side of Central Park and headed to 109th Street near Riverside Drive where her apartment lay. She would go for one of her favorite runs down the Hudson River toward Battery Park. A long run. If Frodo can deliver, so can I. Why not face the uncertain future in the same spirit that brought her to the top of the world. Stay on top, she told herself. Stay on top.

The EWP Da Vinci Code Realized

Most asset protection trusts established by U.S. settlors are considered grantor trusts under U.S. income tax law, meaning that all income of the trust is reportable on the grantor’s (the settlor’s) individual income tax return. Asset-protection trusts do not, in and of themselves, offer any tax advantages under U.S. income tax law.

So why not create a trust that not only gives you asset protection, but the whole formidable array of benefits that EWP provides? To achieve this outstanding result, we suggest using an International Irrevocable Life Insurance Trust (ILIT) which owns a properly structured PPLI policy–The EWP Da Vinci Code.

The ILIT has been in use for decades; it has withstood numerous court challenges, and avoids the taint of opposing public policy that you acquire with DAPTs and OAPTs.

Regarding U.S,. tax laws, a properly designed International ILIT, governed by the law of a foreign jurisdiction, is treated virtually the same as a domestic ILIT. For wealthy U.S. families, or those families with a connection to the U.S., an International ILIT in combination with a properly structured PPLI policy, is arguably the most efficient structure for the integration of tax-free investment growth, wealth transfer and asset protection.

If an EWP Structure Had Been Used….

If an EWP Structure had been used these salient features would have been of great benefit to Janice.

  • Secure, rock-solid asset protection that is not an add-on benefit layered onto an existing structure, but asset protection that is an integral part of the plan, and available from the first day the EWP Structure was put in place.
  • The asset protection provided by the EWP Structure would also shield Janice from capital gain taxation. In our story, we speak of her buyout as $100M. We did not calculate for capital gain tax. In 2020 for Janice at her income level, capital gain tax would be 20%, plus the Medicare Tax of 3.8%. After paying these taxes, Janice would be left with $76,200,000. If she had had an EWP Structure in place, she would have the full $100M tax-free, and in the event of her death, her heirs would receive the full amount or whatever was left at her death tax-free.
  • If she so chose, Janice could begin her multi-city chain of bike shops within the existing structure with all the exceptional benefits that they already provide. Even though it would be a new business, the existing EWP Structure would support it, thus saving her valuable dollars that could be invested in the new bike shop business.
  • In creating the EWP Structure, Janice would have received the proper advice that would either have funded her captive insurance company adequately, so it could support a serious claim like Steve’s accident; or, she would have had third party liability insurance in place to handle the claim, and not jeopardize the company’s assets to pay the claim.

 

by Michael Malloy, CLU TEP RFC.

CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

EWP Stories-1

Expanded Worldwide Planning
International Tax Planning

Stories
Part 1: Privacy

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Privacy is a key element. Wealthy families are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide.

What was once private and personal becomes public and accessible to all. Computers and other electronic devices are part of our lives, whatever our opinion of them. These devices can add convenience and efficiency to our lives, but at a cost.

At EWP Financial we embrace the Privacy Principle. The Privacy Principle is unique as it simply and legally shields wealthy families from unwished intrusions into their financial affairs. At the same time, the Privacy Principle is fully transparent and gives wealthy families a bespoke, compliant asset structure for all their holdings, wherever they might be throughout the world.

Electronic Privacy?

Andrew Grove, co-founder and former CEO of Intel Corporation, expressed the following thought:

“Privacy is one of the biggest problems in this new electronic age. At the heart of the Internet culture is a force that wants to find out everything about you. And once it has found out everything about you and two hundred million others, that’s a very valuable asset, and people will be tempted to trade and do commerce with that asset. This wasn’t the information that people were thinking of when they called this the information age.”

The ancient Greeks called man, “a political animal.” In today’s world almost all so-called facts are politicized. It is no different with privacy. Certain groups consider the journalistic authors of the Panama Papers and the Paradise Papers heros of a free press. Others say that these same journalists were thieves, who unlawfully stole private financial data. Whatever your opinion, these events did happen, and the targets were most decidedly wealthy families throughout the world.

How does the privacy afforded by a properly structured Private Placement Life Insurance (PPLI) policy protect the families whose financial information was published for the entire world to see?

The Privacy Principle of EWP accomplishes its objective in several key ways:

  • Upon transfer into the PPLI policy, the insurance company becomes the beneficial owner of all the assets in the policy;
  • If there is reporting to a tax authority for the asset structure, only one number is reported. This is the total cash value of all the assets in the PPLI policy. The individual assets are not reported;
  • The bank account that is usually opened in connection with a PPLI policy is opened in the name of the insurance company, not the policyowner. The policyowner has full access to the funds in the bank account in accordance with the assets inside the policy.
Part 1

The hot, dry night air seemed to smother the sleek, six passenger Cessna Citation XLS jet. The plane had just touched down on the tarmac of this isolated runway. Next to the gleaming white jet was a gigantic windowless warehouse. The eerie, yellow lights that protruded from the warehouse turned the body of the private jet the color of an overripe mango fruit.

As he emerged from the plane, Carlos Gutierrez felt the skin on his face tighten from the baking heat of the desert. He walked briskly to the newly completed warehouse and his cell phone rang.

He usually did not answer calls from unrecognized numbers, but he was expecting a call from his daughter, Lucinda.

“Hello,” he said. The voice on the other end was strangely familiar.

“Juan, is that you?”

“Yes.” said the now unmistakable voice of his best university friend. The voice was indeed Juan’s, but it had none of the joy and conviviality that he associated with it from university days.

“Carlos, we have your daughter, Lucinda.”

“What? I don’t understand. What do you mean?”

“Carlos, I now do the finances for one of the cartels that Lucinda wrote about in her article. We want ten million dollars for her release. We will not compromise. We want the money now. We will give you 48 hours to deliver it, and, if we don’t receive it, we will be forced to do other things to your beautiful daughter. I will call you in three hours.”

The line went dead.

The Privacy Paradox

In connection to privacy, there is a concept called the privacy paradox that was first discussed by Bedrick, Lerner, and Whitehead, The privacy paradox: Introduction, News Media and the Law:

“The privacy paradox is a phenomenon in which online users state that they are concerned about their privacy but behave as if they were not. While this term was coined as early as 1998, it wasn’t used in its current popular sense until the year 2000.”

The authors go onto to explain this in more detail:

“Some researchers believe that decision making takes place on an irrational level, especially when it comes to mobile computing. Mobile applications are built up in a way that decision making is fast. Restricting one’s profile on social networks is the easiest way to protect against privacy threats and security intrusions. However, such protection measures are not easily accessible while downloading and installing apps.”

Louis Menand excellently expresses the same thought in his New Yorker article, “Nowhere To Hide,” of June 18, 2018:

“How many of us are going to take the time to scroll through the new policies and change our data settings, though? We sign up to get the service, but we don’t give much thought to who might be storing our clicks or what they’re doing with our personal information. It is weird, at first, when our devices seem to “know” where we live or how old we are or what books we like or which brand of toothpaste we use. Then we grow to expect this familiarity, and even to like it. It makes the online world seem customized for us, and it cuts down on the time we need to map the route home or order something new to read. The machine anticipates what we want.”

Legal Challenges

There is also another type of privacy paradox pertinent to EWP in the reporting of data breaches and news reporting on wealthy families. This is aptly put by Filippo Noseda, partner at the Mischon de Reya law firm in London:

“It is somewhat curious that serious newspapers who have been covering both the private banking scandals and the erosion of privacy seem unable to make the connection between data protection on the one hand, and the Common Reporting Standard (CRS) and beneficial ownership registers on the other.”

CRS was initiated in 2014 by the Organization for Economic Co-operation and Development (OECD) with the goal of creating financial transparency between countries that have agreed to implement its directives. Beneficial ownership registers collate information about the beneficial owner of a financial entity in a registry for storage and use by enforcement agencies.

Mr. Noseda also draws our attention to published material by The European Data Protection Supervisor (EDPS) where he questions the OECD’s goal of total financial transparency.

Mr. Noseda writes: “As if they were living on planet Europa rather than in Europe, the European Parliament, the OECD, and politicians show complete disregard for the warnings raised by their own data protection bodies and instead appear hell-bent on introducing a system of total transparency.”

In October 2020, a client of the law firm Mishcon de Reya filed a claim with the district court in Luxembourg challenging beneficial ownership registers, and alleges that the ‘indiscriminate and generalized’ publication of personal details of individuals connected to family enterprises breaches their fundamental rights to data protection and privacy, and exposes them to ‘unnecessary and disproportionate’ risks.

We have grown accustomed to the idea that transparency is a good thing, something that supports the common good. Like many concepts, if taken to an extreme, it becomes its opposite—a weapon in the hands of governments hungry for wealthy citizens’ tax dollars. As proponents of EWP, we must question this overzealous approach to tax collection.

Part 2

Carlos weaved to the door of the warehouse, followed closely by his pilot and co-pilot. Carlos fumbled with the key and finally opened the door to the office warehouse. His long-time pilot and co-pilot functioned also has confidants and body guards, so he told them in Spanish what just occurred.

Carlos was educated mostly in the United States, having received a masters degree in electrical engineering from Columbia University in New York, but English was his second language. Like all of us in times of emotional turmoil, he sought some comfort. Presently the only solace available was to speak his native language.

The plight of his daughter was beyond devastating, but the next step he knew was only a phone call away. He would call his insurance broker. Carlos had purchased Kidnap and Ransom insurance for his family, since the Mexican drug cartels had recently moved into his native Michoacan state, seeking to legitimize their sources of income by terrorizing the local avocado growers. By means of intimidation and violence, they sought access to this lucrative agricultural industry. His family were third generation avocado growers.

What put Carlos into emotional delirium was hearing the voice of Juan, his best friend at Columbia University. Juan had been a model student, an honor student like Carlos, and a kind and generous person. His involvement in his daughter’s kidnapping seemed preposterous. He would not have believed it, if it weren’t for hearing his voice.

Carlos was meticulous in his financial affairs. His company had the ability to assemble the most advanced and sophisticated electronic components. He had become a billionaire in his early 40s through his design of innovative electronics for medical devices. He abided by the law, both in Mexico and the U.S. Carlos was proud to be a citizen of both the U.S. and Mexico, even though it cost financially to do so.

The last time he had spent time with Juan was after college at the family farm outside the city of Uruapan. They had climbed onto one of the old avocado trees, and to drink beer together and eat avocados. They were looking forward to launching their careers after college. He remembered the solid branches supporting them, the ripe avocados at their fingertips, with the dappled sunlight making the tree a private world of their own. He remembered the light being soft and multicolored like the light coming through stained glass in a church. They exuberantly discussed their prospects. Joining a drug cartel was definitely not on their list of future possibilities.

The Past Lacks Privacy

EWP and PPLI can further the aims of wealthy families seeking increased privacy, asset protection, and tax efficiency, but privacy, as we know it today, is a relatively recent phenomena.

We quote two eye-opening passages by Greg Ferenstein’s “The Birth and Death of Privacy: 3,000 Years of History…,” courtesy of Medium:

“Privacy, as it is conventionally understood, is only 150 years old. Most humans living throughout history had little concept of privacy in their tiny communities. Sex, breastfeeding, and bathings were shamelessly performed in front of friends and families.”

“Privacy-conscious citizens did find more traction with what would become perhaps America’s first privacy law, the 1710 Post Office Act, which banned sorting through the mail by postal employees.”

This last quote seems quaint in light of the large-scale, present-day concerns of unauthorized data sharing by social media sites. The Privacy Principle was created to give wealthy families enhanced privacy. Our firm can be confident of our success, because EWP asset structuring greatly simplifies the process, and in addition, gives you the privacy that you seek.

The Dangerous Mouse Click

An adroit insider in the world of data breaches gives us frightening insights into how easily our personal data can be exposed and made public.

Lucia Vazquez,’s “A Millionaire Hacker’s Lessons for Corporate America,” for the Wall Street Journal, October 3, 2020 tells us:

“Santiago Lopez started invading corporate computer systems at age 16, after he learned to hack from YouTube videos and like-minded friends.

Now 21, he says he never wanted to commit crimes. Rather, he is a bounty hunter, invited by companies to find holes in their business networks and burrow into their vulnerable data. The idea is that a company will then fix what’s wrong to harden itself against bad actors—“black-hat” hackers—looking to steal data, conduct espionage and disrupt business operations. Like others in a stable of “white-hat” attack experts associated with bug-bounty firm HackerOne, Mr. Lopez gets paid commensurate with the severity of the weaknesses he identifies. He and other members swarm applications and websites to look for security holes missed by customers that contract with the San Francisco-based firm. Big problems pay big money.”

In the same article, Ms. Vasquez asked these two important questions to Mr. Lopez:

You’re really effective at what you do. What does this say about corporate cybersecurity?

They’re not investing money or time or work in trying to grow their cybersecurity team. A lot of companies, if you report bugs to them, they don’t have the expertise to fix them. Software that they build themselves has more bugs but software generally is vulnerable, always. If software has access to important data, then encrypt it.

What kinds of technology changes are coming that will create cybersecurity problems?

Artificial intelligence has helped us a lot to optimize tasks, process data and make decisions much faster than a human being could. However, new technologies, including artificial intelligence, create big cybersecurity risks, as potential vulnerabilities are not fully understood when they are found. This means that with more organizations relying on machine learning to perform business-critical actions, AI systems are sure to become a major target for hackers.”

Part 3

Diego wondered how he was to receive his bribe. He was told by his contact to buy a burner phone on Wednesday, and throw it away that evening after he received a text. His contact had booked him a table for 7pm at the Bellini Restaurant, atop the World Trade Center on the 45th floor in Mexico City.

“Good evening, sir,” said the handsome young man in his well-tailored valet parking uniform.

His car door was politely closed, and Diego pulled away, feeling somewhat sheepish and out of place with his old Prius at this expensive restaurant in Mexico City. The Bellini was an uncomfortable experience for Diego. This showed in the perspiration draining down his shirt from below his armpits. In his highly excited state, he had forgotten to put on deodorant this morning.

He had barely noticed the dazzling lights that lay below him, as he ate but did not taste the exquisite meal that was paid for by his contact. The restaurant magically revolved, but he might as well have been facing a blank wall. Diego only thought of one thing, and one thing only: “Will I get paid, or will they kill me instead.”

As he was traveling toward his small apartment, he received a text, Look in the glove box, then destroy your phone. I mean destroy it completely.

Diego opened the glove box to find a plain manilla envelope, which he tore open to find cash. Plenty of cash. 400,000 pesos, about $20,000U.S. The equivalent of his annual salary.

Why were 400,000 pesos put in his glove box? The reason was simple. Diego worked at the Servicio de Administración Tributaria (SAT). The SAT is the revenue service of the Mexican federal government. Diego had access to information that the cartel wanted to destroy Carlos Guittierez.

A new law had come into effect January 1, 2020, and stipulates that tax evasion will turn into a charge of organized crime if three or more people are aware of a scheme, which could result in companies being held criminally liable. Diego had access to salient information in Mexico’s Register of Beneficial Ownership. The cartel was going to use this information to charge Carlos under this new law.

How ironic that a successful businessman like Carlos could be discredited by an organized crime cartel when he went to great lengths to comply with all of Mexico’s laws. In a sinister way, the designs of Carlos’s intricate electronic components mirrored the devious, deceptive, and criminal practices of the cartel. One was used for good, and the other to destroy an innocent man.

Corporate Cybersecurity Amis

Large corporate data breaches have become almost commonplace in recent years. Here are a few courtesy of Dan Swinhoe from CSO, April 17, 2020:

Yahoo

Date: 2013-14

Impact: 3 billion user accounts

Details: Yahoo announced in September 2016 that in 2014 it had been the victim of what would be the biggest data breach in history. The attackers, which the company believed were “state-sponsored actors,” compromised the real names, email addresses, dates of birth and telephone numbers of 500 million users. Yahoo claimed that most of the compromised passwords were hashed.

LinkedIn

Date: 2012 (and 2016)

Impact: 165 million user accounts

Details: As the major social network for business professionals, LinkedIn has become an attractive proposition for attackers looking to conduct social engineering attacks. However, it has also fallen victim to leaking user data in the past.

Equifax

Date: July 29, 2017

Impact: 147.9 million consumers

Details: Equifax, one of the largest credit bureaus in the US, said on Sept. 7, 2017 that an application vulnerability in one of their websites led to a data breach that exposed about 147.9 million consumers. The breach was discovered on July 29, but the company says that it likely started in mid-May. The breach compromised the personal information (including Social Security numbers, birth dates, addresses, and in some cases drivers’ license numbers) of 143 million consumers; 209,000 consumers also had their credit card data exposed. That number was raised to 147.9 million in October 2017.”

These large corporate data breaches might seem impersonal and far off, unless you were one of the victims. We finish this section with a more sinister example, that highlights the vulnerable interfaces of our technologically dependent world. This example is again from Mr. Menand’s thoughtful New Yorker article quoted from earlier:

“An Oregon couple’s domestic conversation (about hardwood floors, they said) was recorded by Echo, Amazon’s “smart speaker” for the home, which sent it as an audio file to one of the husband’s employees. Amazon called the event “an extremely rare occurrence”—that is, not a systemic security issue.”

Part 4

One week later Carlos Gutierrez found it difficult to pursue life in his usual diligent and focused manner. His daughter Lucinda had been returned by the cartel, unharmed physically, but shaken to the core psychologically. Carlos was now flying back from San Jose to one of his homes near La Jolla in southern California.

He requested that they take a route directly south from Santa Barbara, over the Channel Islands, only veering west after San Clemente Island. It was the most common route when he flew commercially before he could afford to keep two jets. Carlos was attempting to re-establish some order in his life.

Before the kidnapping and the lawsuit, he and his family inhabited a sane and orderly world, cut off from the concerns of those outside this thin bubble. When it burst more illusions escaped than he had ever thought possible. He could repair things with money, but money alone could not repair his family’s current emotional devastation.

One of his business strengths was the ability to inspire those who could put his creative electrical engineering concepts into integrated circuits and the other components of his medical devices. In San Jose he had visited a shop owned by Koreans, who were excellent to work with, and could manage his sometimes maddening deadlines.

Carlos was spared the emotional distress of having to speak with Juan again. The insurance company that wrote his Kidnap and Ransom insurance took over the successful negotiations with the cartel so that his daughter could be freed. He still could not fathom how his best friend of twenty years ago could now be working for one of the most vicious and notorious drug cartels in Mexico.

Although not currently a churchgoer, he was raised a Roman Catholic. He reflected on the forbidden fruit of the Garden of Eden. Just one week ago, they had lived in a similar paradise. But like Adam and Eve, they could now not return to this peaceful and predictable world.

The moist, soft, delicious avocado fruit was his last link to Juan. After all, the fruit that Eve ate was called the fruit of good and evil. How strange it turned out to be good for Carlos and evil for Juan.

His jet gently sloped down to the runway. He promised himself to protect the privacy of his affairs ever more vigilantly. Yes, the former bubble had burst, but he could construct a more solid one going forward. All he could be sure of was that Juan had taken his path in life, and he had taken another. Carlos’s new path would have to include a new, creative design, presently unknown, but one he vowed to find. After all, that is how he had amassed his billions.

Conclusion

As we are learning, the danger of data collection by online companies is not that they will use it to try to sell you stuff. The danger is that that information can so easily fall into the hands of parties whose motives are much less benign. A government, for example.

EWP and PPLI are employed by our firm to not only give you enhanced privacy, we also keep you compliant with tax authorities worldwide. This is something that other asset structures can’t accomplish. The Privacy Principle is integral to our successful asset structures.

EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

If an EWP Structure Had Been Used….

Can an EWP Structure prevent kidnapping and extortion? While an EWP Structure can’t prevent the nefarious deeds of organized crime, it can go a long way in securing the privacy that can prevent these acts of physical and emotional violence. Had Carlos Gutierrez had a properly executed EWP Structure, it is doubtful that his story would have unfolded in such a painful way. Since an insurance company becomes the beneficial owner of the assets in an EWP Structure, the reporting requirements to government agencies are very limited.

If the drug cartel wished to secure details about the private financial matters of the Gutierrez family, they would be hard pressed to find them. As it was, the details that they needed to kidnap Lucinda and begin their frivolous lawsuit were readily available to them using the Gutierrez’s present asset structure. The precise, pin-point accuracy of the planning that led to the kidnapping of Lucinda would not have been possible with an EWP Structure in place. The information that the cartel used would simply have not been available to them.

Please Contact Us for any questions you may have.

 

by Michael Malloy, CLU TEP RFC.

CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

International Tax Planning and Financial Architecture

Financial Architecture
The Comprehensive Blueprint

 

Would you build a custom home without an architect?

Have you constructed your financial affairs without one?

How would you know?

You have constructed your financial home over time, using the best options available when opportunities presented themselves. This may inadvertently have created a house constructed by multiple architects, many different styles that may or may not fit together.

Why not take the designs that we have used with great success for the world’s wealthiest families to remodel your own house?

As financial architects, we can offer you an overreaching, comprehensive, and cohesive design optimized for privacy, tax efficiency, and asset protection.

We are not here to replace your trusted business or investment advisors. Our role is to take what you have already accomplished and place it into a structure that will create a unified design for all your interests, a method we have used for the world’s wealthiest families, families with a wide variety of assets and financial arrangements.

Read Full Article in our partner site

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by Michael Malloy, CLU TEP RFC.

CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

International Tax Planning At Its Best- 2

Expanded Worldwide Planning (EWP) At Its Best

White Paper-Part 2

 The authority of Expanded Worldwide Planning (EWP) has been firmly established. Wikipedia has recognized our knowledge-based solutions for wealthy families by including the concept of EWP in their article on International Tax Planning. On this Wikipedia page, the six principles of EWP are explained. EWP is defined as “an element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.”

The six principles of EWP are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.

The Wikipedia article goes on to say, “EWP allows a tax paying entity to simplify its existing structures and minimize reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). These international assets can also comply with tax authorities worldwide.”

We are taking a cue from Wikipedia. Our white paper features the six principles of EWP. EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

Compliance Simplifier

For most people a spider’s web is not a positive image. For this reason EWP uses a spider’s web as a symbol of an overly complicated asset structure with multiple entities and a confusing array of boxes and arrows. In its complexity, what we call a Spider Web Structure might look impressive to some, but the end result is summarized in three words: overcomplication, confusion, and uncertainty.

Our excellent alternative is an EWP Structure, which was born out of the necessity to achieve greater tax efficiency, privacy, and asset protection. The laws and regulations that govern an EWP Structure are made possible through a more stable and straightforward body of law than the more politicized tax laws and regulations worldwide.

FATCA and CRS

The beginning of the end for Spider Web Structures began in 2010 with the birth of the Foreign Account Tax Compliance Act (FATCA). The impetus was to stem the tide of U.S. persons using overseas accounts and assets for the purposes of tax evasion. The structure of FATCA is twofold. First, individual taxpayers must report their qualifying foreign income to the Internal Revenue Service (IRS). At the same time, the Foreign Financial Institutions (FFIs) that hold or process that income must report the identity of their qualifying U.S. clients to the United States.

Nine years later, the Organization for Economic Co-Operation and Development (OECD), at the behest of the G20 and the G8, proposed similar regulations under the name CRS, or Common Standard on Reporting and Due Diligence for Financial Account Information. In fact, some commentators, noting the similarities between the two initiatives, have dubbed CRS GATCA, or Global FATCA.

EWP Structures Enter the Picture

Another strong impetus that favors EWP Structures are unexpected disclosures by the press that aim to discredit worldwide financial centers, and the asset structures that are formed in them. The unauthorized publishing of documents in the Panama Papers and Paradise Papers caused financial documents to be made public that were thought to be private.

Some good came out of these disclosures in that those who sought to illegally hide assets from tax authorities were exposed, but at the cost of discomforting many innocent families who had their financial affairs paraded across the popular press.

These families sought to do no more than Judge Learned Hand adjudicated in 1934:

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

EWP Structures for the most part, escape these periodic, unwarranted intrusions into the privacy of ordinary citizens, since they use a more universally accepted aspect of financial planning.

Complexities of Trust Reporting

When overseas holdings involve foreign trusts, things become significantly more complex. As a trustee, grantor, or beneficiary of a foreign trust, you do not want to make a mistake that could cause significant unplanned negative tax ramifications. The way in which you must report foreign trusts to the IRS varies, depending on the type of trust that’s involved.

For an EWP Structure that is owned by a foreign trust there would be reporting for the owner of the trust, but at the policy level only FinCen Form 114 and Form 8938 are currently required, and, only the total value of the assets in the PPLI policy are reported, not the individual assets themselves.

Why engage in complex trust and entity planning that just produces overcomplication, confusion, and uncertainty—yes, Spider Web Structures? You can definitely accomplish much more with a simple and straightforward EWP Structure.

Trust Substitute

The more sophisticated tools gravitate toward the most sophisticated users of these tools. A Stradivarius violin is used by a master violinist and not a beginner. When clients and advisors initially approach us about EWP Structures, they are confused about their uses.

For the most part, what these clients and advisors have read about are the beginning uses of EWP Structures. They have not explored the upper reaches and more sophisticated uses of EWP Structures that employ these structures to their full effect. To keep to our analogy, they have picked up a beginner’s violin, and know nothing of the deep, rich, and more pleasing tone of the Stradivarius violin.

The sixth principle of EWP is Trust Substitute. An EWP Structure can sometimes be used as a substitute for a trust in some civil law jurisdictions. An EWP Structure is also a substitute for existing trust structures that families might be using, and can propel these existing structures beyond the beginner stage of financial planning. This is what we employ for the world’s wealthiest families.

Advisors Don’t Know What They Don’t Know

The confusion about the uses of EWP Structures that we mentioned in our opening paragraph is exacerbated by the system that educates attorneys, accountants, trust officers, and asset managers. There is virtually no mention of EWP Structures in colleges, universities, law schools, and the other training grounds of these professionals.

For instance, attorneys spend time learning the various uses of trusts, so they produce these for their clients, even when they are not always the best tool for the job at hand. They don’t know what they don’t know.

Trusts serve an essential purpose in planning for the world’s wealthiest families, but over reliance on them is a grave mistake. If done correctly, the marriage of a trust with an EWP Structure can indeed be a happy one.

A Safe Drive to the Ultimate Destination

We will use a multi-lane motorway or freeway as our analogy to show how EWP Structures are ideally positioned to serve the needs of wealthy families worldwide. Where are EWP Structures positioned on this motorway?

The fast lane is for those drivers who are the risk takers, traveling at ever faster speeds until they hear the sound of a patrol car chasing them down. In the slow lane are those drivers who wish to drive the speed limit, or wish to travel at a leisurely pace to reach their destination. In the middle lanes are those drivers who wish to blend into the flow. Not be the fastest on the road, or the slowest. In the universe of financial planning tools, EWP Structures are traveling in these middle lanes.

These middle lane drivers are avoiding the newest innovations in planning techniques championed by those in the fast lane, and, also, staying away from strategies that accomplish little which are adopted by those in the slow lane. The drivers in the middle lanes will reach their destination safely with little risk of a confrontation with the authorities, who are concentrating on the drivers in the fast lane.

By using EWP Structures, the families driving in the middle lanes accomplish the maximum amount of privacy, asset protection, and tax efficiency, and are fully compliant with tax authorities worldwide.

Is It Legal?

It seems every few months that there is another revelation of a tax dodger using offshore accounts to avoid U.S. taxes. Here is a recent newspaper headline: “The IRS Reals in a Whale of an Offshore Tax Cheat—and Goes for Another.”

Is an EWP Structure just another one of these schemes? Our EWP Structures have existed since the early 1990s with no issues of any kind either from the IRS or the families who have employed these asset structures.

We have no less an authority than the U.S. Government Accountability office (GAO) to validate EWP Structures. The GAO provides fact-based, nonpartisan information to Congress. Jessica Lucas-Judy, a GAO director, writes:

“Obtaining insurance from offshore companies can provide legitimate federal tax benefits, as long as the insurance is genuine and taxpayers accurately report assets, claim appropriate benefits, and pay taxes owed.”

All out EWP Structures are thoroughly researched to compile with all laws and regulations that might apply to them. We undertake this both for our U.S. families and those from other countries throughout the world. A July 2020, GAO report reads:

“Offshore variable life insurance products, which are insurance policies with investment components over which the insured has certain control, may be abused if the individual taxpayer fails to meet IRS reporting requirements or pay appropriate federal income taxes. Federal regulations require that taxpayers with certain foreign life insurance accounts report this information to the IRS and the Financial Crimes Enforcement Network. The structure of life insurance products may vary and taxpayers are required to pay taxes based on the underlying type of financial product the policy represents.”

We comply with all requirements for the reporting of foreign accounts. This extends to all tax authorities worldwide and the Financial Crimes Enforcement Network in the U.S. Families are informed of all their tax paying obligations both in the U.S., and any tax authority worldwide that may be involved in the transaction. This is all thoroughly researched before the EWP Structure is put in place.

Can They Steal My Money?

The answer is, “No.” Why is this so? Because all your assets are held in separate accounts by a trustee. This is a similar arrangement to having a trust account at a bank. The bank becomes the trustee of the asset, but ownership does not change hands—you retain ownership of all the assets held in an EWP Structure.

Here is an example of how a separate account is defined by one of the key jurisdictions that we use to establish an EWP Structure.

“The assets of the company are segregated into separate accounts that are kept separate from the general assets of the company. The “assets of a separate account” include firstly, the specific assets owned by a company allocated and credited to the separate account. It also includes all income, interest, gains, expenses and losses incurred or earned, in respect of the company’s dealing with the assets that are allocated to the separate account in accordance with the terms of the contract that relate to the establishment of the separate account.”

Conclusion

Our firm, EWP Financial, serves wealthy families wherever they might reside. We offer the most advanced financial planning tools available to assist them in making the six principles of EWP the building blocks of their asset structures.

As our outstanding track record has proven, the asset structures that we build have remained solid for multiple generations, bringing wealthy families financial security and peace of mind.

Download full White Paper

by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc

Michael Malloy-CLU-TEP

 

 

 

 

International Tax Planning At Its Best-1

Expanded Worldwide Planning (EWP) At Its Best

White Paper-Part 1

The authority of Expanded Worldwide Planning (EWP) has been firmly established. Wikipedia has recognized our knowledge-based solutions for wealthy families by including the concept of EWP in their article on International Tax Planning. On this Wikipedia page, the six principles of EWP are explained.

EWP is defined as:

“An element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.”

The six principles of EWP are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.

The Wikipedia article goes on to say,

“EWP allows a tax paying entity to simplify its existing structures and minimize reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). These international assets can also comply with tax authorities worldwide.”

We are taking a cue from Wikipedia. Our white paper features the six principles of EWP. EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

Read full article in our partner site.

 

by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

International Tax Planning & Trust Substitute-Part 2

International Tax Planning and Trust Substitute

Part 2

EWP (Expanded Worldwide Planning) and Trust Substitute

Private Placement Life Insurance (PPLI) in Action

A Stradivarius Violin Plays the EWP Super Trust

 

In Part 1 we spoke about how a beginner’s violin knows nothing of the deep, rich, and more pleasing tone of the Stradivarius violin. We equated the Stradivarius violin with the more sophisticated uses of asset structures that employ PPLI to its full effect. In Part 2 we will learn about the EWP Super Trust, which indeed uses the deep, rich, and more pleasing tone of the Stradivarius violin.

Ironically, the most simple PPLI structure, a Frozen Cash Value (FCV) policy, offers wealthy families the most advanced structuring possibilities available in the world today. A family can place almost any asset class that is located almost anywhere in the world into a FCV policy, and still have it compliant with tax authorities worldwide.

The FCV PPLI structure almost eliminates the concept of cash value in the traditional sense. The growth element of the assets in the policy is paid out as a tax-free death benefit at the death of the insured person(s) in the contract. The amount of the death benefit to qualify as life insurance is just a percent or two of the total assets contributed to the policy, as there must be a risk shifting element to qualify as life insurance under the laws of the jurisdictions who issue the policies.

The maximum the owner of the policy can withdraw is the total value of the premium contributed to the policy. This includes in-kind premiums. The structures that we create for the world’s wealthiest families have sizable premium contributions, frequently in the hundreds of millions and multiple billions. Therefore, if withdrawals from the policy are wished, there is plenty to withdraw. More frequently there are no withdrawals, as these families can accomplish what they wish inside the existing FCV PPLI structure.

Read full article in our Partner Site

Download PDF

 

by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

 

International Tax Planning & Trust Substitute

International Tax Planning and Trust Substitute

Part 1

EWP (Expanded Worldwide Planning) and Trust Substitute

Private Placement Life Insurance (PPLI) in Action

The Dangers of Over Reliance on Trusts

The more sophisticated tools gravitate toward the most sophisticated users of these tools. A Stradivarius violin is used by a master violinist and not a beginner. When clients and advisors initially approach us about Private Placement Life Insurance (PPLI), they are confused about its uses.

For the most part, what these clients and advisors have read about are beginning uses of PPLI. They have not explored the upper reaches and more sophisticated uses of asset structures that employ PPLI to its full effect. To keep to our analogy, they have picked up a beginner’s violin, and know nothing of the deep, rich, and more pleasing tone of the Stradivarius violin.

We will now discuss the sixth principle of Expanded Worldwide Planning (EWP), Trust Substitute. We will of course speak of the obvious use of a PPLI asset structure in place of a trust structure in some civil law jurisdictions, but we will also expand our discussion to explore the very nature of trust and how they differ from the sophisticated structures that we use for the world’s wealthiest families. Our discussion will also touch on why a PPLI structure is a far better tool for the client who seeks both maximum privacy, asset protection, and tax efficiency, as well as full compliance with the world’s tax authorities.

Advisors Don’t Know What They Don’t Know………..

 

Read full article in our Partner Site

Download PDF

by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc

Michael Malloy-CLU-TEP

 

 

 

International Tax Planning & Compliance Simplifier-Part 2

EWP (Expanded Worldwide Planning) and Compliance Simplifier

Part 2

Private Placement Life Insurance (PPLI) in Action

Inside a Deadly Spider Web Structure

Depending on the planning needs of international families, two types of trusts are generally used, Foreign Grantor Trust and Foreign Non-Grantor Trust. These trusts can accomplish some of the aims of the six principles of EWP, but they can do nothing in terms of tax efficiency. For this a trust must own a properly structured PPLI policy. An EWP structure uses the six principles of EWP to give families the optimum amount of tax efficiency, privacy, and asset protection.

Foreign Grantor Trusts and Foreign Non-Grantor Trusts

Read full article

Download PDF

 

by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc

Michael Malloy-CLU-TEP

 

 

 

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