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The Rule of Law in Action

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PPLI Brings Ultimate Sophistication

Private Placement Life Insurance (PPLI) brings the words of Leonardo da Vinci to life:

“Simplicity is the ultimate sophistication.”

The transformation from simplicity to sophistication can be accomplished through the rule of law. In our PPLI work for wealthy international families, we must frequently turn complex and sometimes contradictory tax laws into a simple, understandable, and workable structure.

Detailed analysis of the laws that govern the nationalities and residences of the family members must be undertaken. We welcome this challenge and enjoy the process. This thorough and meticulous study is highly individual to each family, so our short article is not the appropriate place to give a detailed example. Further on, we will bring you some humorous and not-so-humorous news stories on the rule of law.

There are always three elements in a PPLI policy: the owner of the policy, usually a trust; the life or lives insured; and the beneficiary of the PPLI policy’s death benefit. The domicile of each of these three elements must be studied. The domicile of each of these elements of the PPLI policy might be different, and a misinterpretation of the laws that affect each could lead to a wrong result in structuring for the family.

We diligently pursue this study. We frequently adjust the PPLI structure to make the elements work for the family, ensuring compliance with all the tax authorities involved. The rule of law also has its light side too. As we read in this recent Wall Street Journal article, by Josh Jacobs and Matthew Dalton. What we find humorous is not the present-day rodent situation in Paris, but the legal argument put forward in the 16th century when France was faced with a similar problem.

In France, Even the Rats Have Rights

Rodents overrunning Paris have defenders who say the varmint has a right

to inhabit the City of Lights too.

‘Rat-Prochement’

PARIS—Rats were popping up at supermarkets, parks and nurseries when a city official convened a crisis meeting last fall to discuss ways to cull the population.

That was the first time Geoffroy Boulard, mayor of the 17th arrondissement in northwestern Paris, realized the rodents are backed by a vocal lobby. Ten protesters stepped forward to denounce exterminators’ plans to poison the animals. They urged a more humane method: Deploy birth-control drugs.

In the Middle Ages, people were helpless to stop the creatures from invading pantries and destroying crops. Lacking effective poisons, authorities took to bringing legal charges against rats for their misdeeds, according to “The Criminal Prosecution and Capital Punishment of Animals,” a lengthy history by E.P. Evans.

The rats weren’t defenseless in such cases. When an ecclesiastical court in Autun, France, brought charges in the 16th century against a group of rats for destroying the local barley crop, a well-known lawyer named Bartholomew Chassenée was appointed by the court to represent them. Mr. Chassenée mounted a vigorous response.

“He urged, in the first place,” Mr. Evans wrote, “that inasmuch as the defendants were dispersed over a large tract of country and dwelt in numerous villages, a single summons was insufficient to notify them all.”

Now a more serious issue that relates to the families that we serve from the website of the international law firm, Mishcon de Reya.

Legal challenge to Common Reporting Standard

(CRS) and Beneficial Ownership (BO) registers

Mishcon de Reya has taken legal steps against the Common Reporting Standard (CRS) and the Beneficial Ownership registers to call into question the wider repercussions for fundamental rights and the relationship between individuals and the State.

Our contention is that the publication of sensitive data concerning the internal governance and ownership of private companies by the Beneficial Ownership Registers is not necessary to achieve the stated objectives. Similarly, we believe that the exchange of information under the CRS is excessive, as information is exchanged indiscriminately and affects all account holders regardless of the size of the account.

Our firm is dedicated to putting the rule of law to the best use for our PPLI clients. We invite you to join our group of satisfied, wealthy, international families by contacting us today.

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

#michaelmalloy #michaelmalloysolutions #advancedfinancialsolutions #ppli

How Is Change Implemented with PPLI?

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Change Comes Slowly to PPLI

Private Placement Life Insurance (PPLI) gives wealthy international families a conservative structure to achieve enhanced privacy and a tax free environment for their assets. At first glance, it would not seem that PPLI would share something in common with Ralph Lauren, the well-known fashion designer, but read on, and you will see how they are connected.

PPLI structuring is basically using available laws and regulations to the best possible advantage for each unique family situation. Why not take a “straight and narrow” route and avoid issues with the tax authorities of all the countries involved in the structure?

Life insurance is well established in the laws and regulations of most countries in the world. It is considered a benefit to society:

“Life insurers are vital to an efficiently functioning modern economy and society and are a key contributor to long-term economic growth and improved living standards,” states a 2016 report by The Brattle Group, “The Social and Economic Contributions of the Life Insurance Industry.”

Because life insurance permeates the social fabric at all economic levels, the laws and regulations on life insurance tend to be more stable and less subject to political change. Later on we will give you an example of how a tax law change in the U.S. is playing out in a complex manner that will take many years to fully resolve.

What are a few key elements that show us why it is vital to use life insurance in structuring for wealthy international families? Here are two significant ones:

Simplified Reporting

A compliant PPLI policy is an asset that can hold various investments, including multiple underlying traded or non-traded companies as well as private equity. The insurance company is legally seen as the owner of these investments, hence this simplifies the reporting requirements under most reporting regimes. CRS reporting is also simplified and limited, based on correct structuring at the inception of the process.

Asset Protection

PPLI can offer privacy and, in some cases, significant protection from creditors. Assets held in a PPLI policy are held in a Separate Account and are protected from the assets of all other policyholders and the general account of the insurance Company.

Here is our example of how a recent tax law change is playing out in the U.S.

New Hampshire Fights Supreme Court

Sales-Tax Ruling

Retailers in five states without a sales tax face new burdens

New Hampshire is one of five states without a broad-based statewide sales tax, a status that had insulated retailers from a task familiar to businesses elsewhere. That cushion lasted until the U.S. Supreme Court’s June decision in South Dakota v. Wayfair, which lets states require retailers to collect sales taxes even if those businesses lack a physical presence in the state.

States with sales taxes are still figuring out how they’ll approach out-of-state retailers. New Hampshire, with a special legislative session scheduled for Wednesday, isn’t waiting to respond. Its reaction to the court’s decision will spur the next round of skirmishes over cross-border sales-tax collection.

States with sales taxes are working on their regulations to get out-of-state sellers registered in their systems and collecting the tax. In some cases, they need to wait for their legislative sessions for new or revised laws.

Does all this sound familiar? Change the actors and subject matter in the play and you have the worldwide reactions to implementing FATCA, CRS, Registers of Beneficial Ownership and other mandates from governments and regulatory bodies around the world.

Although far from timeless, our firm’s PPLI structures that use life insurance as its core element have withstood many years of changes in transparency, tax legislation, and calls from government officials to end “aggressive tax planning.” Planning with life insurance could be seen as the eye of the hurricane–an area of calm in the midst of constant change. We achieve outstanding results without being aggressive.

We thank Ralph Lauren for his quote, and enjoy the challenge of securing exceptional results that have weathered many storms. As always, we welcome your comments and questions.

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

#michaelmalloy #michaelmalloysolutions #advancedfinancialsolutions #ppli

What Is Money?

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Fungibility Is Key to PPLI

At the center of a Private Placement Life Insurance (PPLI) structure is fungibility. For PPLI this means in essence taking assets in a taxable environment into one that is tax-free. According to the Merriam-Webster dictionary, fungibility derives from the Latin verb fungi meaning “to perform (no relation to the noun “fungus” or the plural “fungi.”)

If something is fungible it is mutually exchangeable like an ounce of gold, or in other circumstances, as we will read further on in our article, the U.S. dollar held in the form of $100 bills.

This mutual exchange for a taxable environment for one that is tax-free is accomplished in PPLI by using life insurance. Perhaps a fungible transaction is not quite the right analogy.

Life insurance in the structure functions more like a membrane, where once the assets are properly structured inside the PPLI policy, the assets become recharacterized into a solution that has both outstanding tax benefits as well as enhanced privacy. Clients also can permeate this membrane for tax-free distributions on the income from the assets.

Worldwide life insurance has a tax-favored status, and this exchange from taxable to non-taxable can be accomplished with the creation of a PPLI structure that takes into account these key elements in a wealthy family’s situation:

Nationality of the family members;
Country of residence(s);
Location and type of assets;
Laws pertaining to trusts, life insurance, and other entities to be used;
Aims and goals of planning.

Once these elements are researched and analyzed, a tailor-made structure can be created for the family. Wealthy international families are drawn to PPLI structures, in part, because of the legitimate enhanced privacy that can be accomplish inside this structure.

Governments and their tax authorities are in place, in the highest form, to secure the public good through the collection of taxes. Their citizens also have rights to privacy and, within the realm of law, to protect their private property from harm. Therefore, there is a built-in tension between these two aims.

Another built-in tension can occur in the financial world. What happens when a country’s institutions don’t support a traditional banking system? One occurrence is that new systems are created to support the unique circumstances. Let us take the extreme example of Somaliland.

For this example teaches us one of the underlying properties of what we call money: a means to facilitate a transaction. We are thankful to Matina Stevis-Gridneff in a recent Wall Street Journal article for these excerpts.

“An Isolated Country Runs on Mobile Money”

“HARGEISA, Somaliland—Hyperinflation and economic isolation have pushed this poor, breakaway republic closer to a virtual milestone than most other countries in the world: a cashless economy.

The continent, home to many of the world’s frontier economies, has come closest to skipping, or “leapfrogging” as it’s often called, traditional brick-and-mortar banks and going straight to heavily using phones as wallets.

And nowhere are the benefits of mobile money more apparent than in Somaliland, where the extreme economic and financial conditions have allowed Zaad, a service from the main local telecom, Telesom, to catalyze commerce in one of the most isolated parts of the world.

Once a week, Abdulahi Abdirahman hauls two bulky, heavy sacks of shillings from his gas station across Hargeisa to the money-exchange area downtown and, several hours later, returns with just a few dollar notes in his back pocket and his Zaad wallet loaded up.

Clients pay Mr. Abdirahman in Somaliland shillings. He needs to pay suppliers in dollars. Using Zaad, he gets half the payments in mobile money, meaning the cumbersome ritual has become more manageable in these times of high inflation.”

Money in Action Using PPLI

Now, again courtesy of The Wall Street Journal, by Joe Craven McGinty, we find another example of how money works in the real world.

“Cash Flow or Cash Stash? How Money Moves Around”

A record level of U.S. cash is circulating, but Americans aren’t spending the bulk of it.

So, where’s the money?

Up to two-thirds—or as much as $1.07 trillion—is held abroad. About $80 billion is held domestically by depository institutions. And the rest—as little as $453 billion—is in the hands of domestic businesses and individuals.

Last year, according to figures published by the Fed, $1.6 trillion was in circulation, including $1.3 trillion in $100 bills, or 80% of the total. In 1997, $458 billion circulated, including $291 billion in $100s, or 64% of the total.

The circulating currency held abroad could range from one-half to two-thirds of the total, the Fed estimates, or a range of $800 billion to $1.07 trillion.

Wealthy families worldwide have the option of creating their own unique structures using PPLI. These structures can become, in effect, private banks. By uniting PPLI with family assets and a bespoke banking relationship, much is achieved that cannot be accomplish in any other way. Please let us know how we can assist you in this endeavor. We welcome your questions and comments.

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

PPLI Hits the Mainstream with Bloomberg

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EWP: A Giant Structuring Tool

Since we work with wealthy international families, we are expert in using Private Placement Life Insurance (PPLI) as a structuring tool. Our approach is called Expanded Worldwide Planning (EWP). A few weeks ago Bloomberg ran an article on PPLI, “How to invest in Hedge Funds and Pay No Taxes.” We offer quotes and a video about the article below.

First some basics on EWP, and how a properly structured policy can excellently serve the needs of wealthy international families.

All assets inside the PPLI policy receive tax deferral, not only investments, but business income too.
The assets pass tax-free to the beneficiaries named in the policy. In a properly structured policy one creates a tax-free environment for these assets. Assets can be located anywhere in the world.
Because life insurance is used, FATCA and CRS reporting is greatly simplified, and in some cases, is eliminated.
Families receive enhanced privacy, because the insurance company becomes the beneficial owner of the assets inside the PPLI policy.
The EWP structure provides excellent asset protection.
The EWP structure is low cost with fees averaging 1% of assets.
The EWP structure is fully compliant with the tax authorities of all tax jurisdictions.
Should an untimely death of the wealth creator occur, his family is protected with a tax-free death benefit.

More on Product vs. Structure

The Bloomberg article mentioned above speaks about PPLI as a product, which of course it is, but most importantly it is an EWP structuring tool. One quote from the article is of note:

“When I would talk about it years ago, people looked at you funny,” said Edward Gordon, founder of Preservation Capital Partners. Lawyers for the wealthy hadn’t heard of PPLIs and often dissuaded their clients from trying a product that “sounded too good to be true,” he said. Now, “it’s reaching somewhat of a tipping point.”

Unfortunately, the ignorance of PPLI’s planning possibilities even goes beyond lack of knowledge. Many asset managers naively sell against insurance structuring, and do not realize that the unique tax advantages of PPLI will give the assets they manage a significant boost in performance. This is especially true for long-term investments, and those intended for future generations.

Here are some other key quotes from the Bloomberg article by Heather Perlberg and Ben Steverman.

“This is a sexy product that people get excited about owning and tell their friends about,” said Aaron Hodari, a managing director at the advisory firm Schechter Wealth. “It’s an alternative investment that allows you to invest in hedge funds and defer or eliminate taxes.”

“Athletes, celebrities, and family offices are embracing private placement life insurance, or PPLI, as a way to preserve wealth for their heirs. It’s a strategy that’s perfectly legal and has existed for decades. While insurance funds are typically a way to protect assets from lawsuits, the main appeal of PPLIs is that they can help investors avoid taxes on capital gains, ordinary income and high-net-worth estates.”

Bloomberg’s Peggy Collins now offers us a short video about the Bloomberg article:

We invite you to explore with us the structuring possibilities of PPLI and EWP. As always, your comments and questions are indeed welcomed and appreciated.

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

Foreign Investment in U.S. Real Estate

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PPVA vs. a “Blocker” Corp. Structure

A sizable portion of the $350-500U.S. billion foreign inbound investment in the U.S. annually is placed in real estate. A Private Placement Variable Annuity (PPVA) can greatly reduce taxation and reporting requirements on these investments. The PPVA structure outlined in this blog is superior to the usual blocker corporation structure.

For the main points in this blog, we are indebted to Gerald Nowotny, a U.S. attorney, who writes frequently on Private Placement Life Insurance (PPLI) and PPVA topics. Mr. Nowotny’s recent article on PPVAs,“It Do Me Good!” is our source.

According to Mr. Nowotny, the PPVA structure accomplishes several important tax and non-tax objectives:

“Avoidance of the need on the part of the foreign investor to file a U.S. income tax return and falling under the scrutiny and jurisdiction of the IRS.

Recharacterization of income that would be otherwise subject to taxation at the top corporate rates into interest and dividend income that is subject to lower tax rates under applicable tax treaties with the U.S.

Avoidance of withholding for FIRPTA on the underlying real estate.

Minimization of corporate taxation on the “blocker” corporation structure frequently used as part of this planning.”

Our blog is usually about the uses of PPLI structures for wealthy international families. At times the use of a PPVA structure makes more sense, so we give you an example from Mr. Nowotny’s article to illustrate this point.

We have changed the example used in Mr. Nowotny’s article slightly, because we favor using offshore companies,who in this case, have made a 953(d) election. We have found that this results in more streamlined compliance reporting.

PPVA Structuring Example

Acme Investment Management is a real estate investment management organization investing in several different U.S. real estate markets. Acme creates an insurance dedicated fund (IDF) with the life insurance company, Corona Life, that will issue the annuity. We quote from the full article:

“Based upon the total premium (investment) commitment, Corona charges the policyholders 25 basis points per annum. The total cost per year is $250,000 per year. Over the course of the twenty year life of the fund-the total projected PPVA costs are $5 million. The total cost of the PPVA is roughly equal to the investor’s tax liabilities using the blocker corporation in the first 2-3 years.

The PPVA will not have any withholding for FIRPTA. Under the treaty, annuity income is not subject to U.S. income and withholding taxes. Therefore, neither Acme nor Corona will be required to withhold anything on its distribution.

Assume the same facts as the description above except for the fact, that the PPVA structure has no tax leakage. Corona does not have any withholding tax obligation on the income distributions of any of the annuity payments or at liquidation of the investments. Corona is not subject to withholding under FIRPTA on the sale of the real estate.”

Please let us know how a PPVA structure can assist you in planning for the U.S. real estate investments of non-U.S. persons. We welcome your questions and comments.

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

PPLI: Life Insurance Defined

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#PPLI OVERVIEW

Life Insurance for International Clients

(Updated)

Private Placement Life Insurance (PPLI) has a clear advantage in structuring for international clients. In most countries life insurance is defined in their legal codes, and considered a well-accepted benefit for society as a whole. Life insurance is something every one either has or can provide needs justification.

In today’s world of increased tax transparency, after the enactment of FATCA and CRS, life insurance in the form of PPLI not only can give clients increased tax transparency, it can produce a structure that is simple and straightforward.

This is largely accomplished by the fact that in a properly designed PPLI structure the life insurance company becomes the beneficial owner of all the assets inside the policy, and only reports the total cash value of these assets—no other details.

In designing policies for international clients, we endeavor to find what are termed safe harbors. What are these safe harbors? They are sections of the tax codes of countries that clearly define a concept. We then model our structures so that the elements of the structure fit these clearly defined concepts. For those countries that use a common law approach in their tax codes, we are also able to find even safer harbors if case law rules favorably on the tax codes that we use as the framework of our structure.

So, if PPLI structures are able to solve the important issues of increased client privacy and a simplified tax transparent structure, it behooves us to establish a definition of life insurance. We will now give a brief history of how life insurance has been defined in the U.S. tax code, as it pertains to structuring for international clients.

Before the enactment of the Deficit Reduction Act of 1984, which created Code Section 7702, life insurance was only rudimentarily defined. At this time, the Code Section that gave the clearest definition of life insurance was Code Section 101(a), issued in 1957. The definition of life insurance hinged on some element of risk-shifting. The magnitude of the risk was not at issue.

A 1941 Supreme Court case, Helvering vs. LeGierse, concluded that “historically and commonly, insurance involves risk shifting and risk distribution.” This case gives us a definition of life insurance consistent with Code Section 101(a).

Fast forwarding to 1984 and Code Section 7702(a), life insurance is defined for U.S. federal tax purposes as a contract which is a life insurance contract “under the applicable law,” if it meets either the cash value accumulation test or the guideline premium test. Both of these tests are designed to insure a high level of pure death risk coverage relative to the amount of premium contribution. If it fails to meet either of these tests, a contract can be a valid life insurance contract under Code Section 7702(g).

Particularly for clients who are non-U.S. persons, we frequently employ a structure that comes under Code Section 7702(g), so that the least amount of life insurance can be used. This is the so-called Frozen Cash Value (FCV) PPLI policy. To further accomplish a tax-free death benefit to beneficiaries, we also look to Code Section 101(a) to define life insurance in this context.

As far as reporting to tax authorities is concerned, PPLI can mitigate or simplify reporting associated with pre-immigration planning and U.S. exposure, Controlled Foreign Corporation (“CFC”) holdings, FATCA, and CRS.

As always, we welcome your comments, questions, and a brief fact pattern to determine if our Expanded Worldwide Planning (EWP) concepts for PPLI structures can be employed successfully for you. We thank you for your continued trust and confidence.

by Michael Malloy CLU TEP RFC, @ EWP Financial

Tax Compliant and Tax-Free Distribution Channel

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Are you working with PPLI?

If you work with Private Placement Life Insurance (PPLI), at some point in a transaction you must address the issues of diversification and investor control. In the US context, code section 817(h) pertains to diversification and these Revenue Rulings for investor control: Rev. Rul. 77-85, 1977-1 C.B. 12; Rev. Rul. 82-54, 1982-1 C.B. 11; Rev. Rul. 2003-91; Rev. Rul. 2003-2 C.B. 347 (Jul. 24, 2003).

What if you were able to structure a policy that managed your clients’ assets in multiple jurisdictions throughout the world without any concern for diversification of investments and investor control issues? What if you could even include US persons in the structure and be in compliance with US tax law, and not be concerned with diversification of investments and investor control issues?

The PPLI policy would then become in effect a tax-free distribution channel for the client with multiple asset classes inside the policy. The assets would grow tax-deferred, and pass as a tax-free death benefit when the insured passes. (A technical discussion of diversification and investor control issues, as it relates to variable insurance contracts and PPLI in particular, is not in the scope of this brief article.)

Life insurance law of Barbados

At the heart of this structure is the simple and straightforward variable life insurance law of Barbados. We have produced the code sections of the Barbados code that are most relevant for international client structuring at the end of this article. These sections are remarkable for the few points that must be complied with to achieve a compliant policy.

Can real estate and ongoing businesses be included in these structures? Again, with proper planning and careful attention to structuring, the answer is definitely, “Yes.”

We welcome your brief client fact pattern, so we can show you what is possible. Our structures achieve tax savings and keep full compliance with tax authorities. If you are looking for structures that offer your clients privacy and still include tax compliance, our PPLI structures can be your solution. We welcome your inquiries.

CHAPTER 310 INSURANCE
An Act to revise the law regulating the carrying on of insurance business in Barbados in order to strengthen the protection given to policyholders; to increase the capital and solvency requirements of insurance companies; to expand the existing regulatory framework to include the regulating of all insurance intermediaries; and to give effect to matters related thereto.

PROVISIONS RELATING TO VARIABLE INSURANCE BUSINESS
(5) The Supervisor may attach such further conditions to the issue of approval under subsection (1) as are relevant to the nature and class of the variable insurance business that the insurer intends to carry on including
(a) requiring the insurer to disclose to any applicant for a policy any one or more of the following:
(i) a statement of the investment policy of any separate account maintained in respect of such variable insurance policy including a description of the investment objectives intended for the separate account and the principal types of investments intended to be made, and any restrictions or limitations on the manner in which the operations of the separate account are intended to be conducted;
(ii) any restrictions or limitations on the manner in which the operations of such variable insurance policy are intended to be conducted;
(iii) a statement of the charges and expenses in respect of such variable insurance policy;
(iv) a summary of the method to be used in valuing assets in respect of which benefits under such variable insurance policy are to be determined; and
(v) illustrations of benefits payable under the variable insurance contract;
(b) requiring that any material contract between an insurer and suppliers of consulting, investment, administrative, sales, marketing, custodial or other services with respect to variable life insurance operations shall be in writing and provide that the supplier of such services shall furnish the Supervisor with any information or reports in connection with the services which the Supervisor may request in order to ascertain whether the variable life insurance operations of the insurer are being conducted in a manner consistent with this Act, and any other applicable law or regulation;
(c) requiring the insurer to furnish, in such manner and at such times or intervals as may be prescribed, such information relating to the value of benefits under the policies as may be prescribed, whether by sending notices to the policy-holders or depositing statements with the Supervisor;
(d) requiring that the variable insurance policy be in a specific form or contain such mandatory provisions as may be prescribed in any regulations;
(e) requiring that the insurer maintain reserves in addition to any reserves which the insurer is required to maintain under this Act;
(f) restricting the descriptions of property or indices of value of property by reference to which benefits under the policy will be determined in accordance with the regulations prescribed for such purpose; or
(g) regulating the manner in which and frequency with which property of any description is to be valued, for the purpose of determining the benefits, and the times at which reference is to be made for that purpose to any index of value of property in accordance with the regulations prescribed for such purpose.

We welcome any comments on the topic. You can place them at the bottom of this page. Thank you!

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