The Expanded Worldwide Planning Stories Video Series – Part 2 – Episode 2 – ASSET PROTECTION 2

Asset Protection-Episode 2

International Tax Planning

Asset protection planning

Introduction

Welcome. The goal of many entrepreneurs is to grow a successful business, then sell it and retire on the profit of the sale. Janet Johanson was such a person, but because of poor asset protection planning, her $100M from the sale of her profitable wine store business was snatched from her on the eve of her retirement.

A key element of any asset structure should be asset protection. Indeed one of the six principles of Expanded Worldwide Planning, or EWP for short, is asset protection. With EWP the key element of asset protection is embedded into the structure, and is not an additional element that must be added at additional cost and complexity.

Watch Episode 1

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

 

 

 

The Expanded Worldwide Planning Stories Video Series – Part 1 – Episode 2

#EWP : Insures: PRIVACY –  Part 2

Welcome. The topic of our story is Privacy. You gain an immediate understanding of Privacy when you are deprived of it. What better example of this than the personal violation that you experience when someone you dearly love is kidnapped? In Part 2 of our story, we learn more of the emotional trauma that Carlos Gutierrez experiences when his daughter Lucinda is kidnapped by a Mexican drug cartel.

Watch the introduction: Episode 1

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

The Expanded Worldwide Planning Stories Video Series – Part 1 – Episode 1

EWP : Insures: PRIVACY – 1

Welcome! Here we begin a new series of stories to dramatize the six principles of Expanded Worldwide Planning, or EWP for short. This story will teach you how an EWP asset structure could have prevented the kidnapping of the journalist daughter of a billionaire Mexican-American businessman.

 

Note: The opinions expressed in this video are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any financial structure, investment, or insurance product.

We appreciate your comments and questions.

Thank You.

~ Michael Malloy

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

4 Essential Minutes on PPLI Series – 4

Four Essential Minutes on Private Placement Life Insurance, (#PPLI)

Part 4

The Six Principles of Expanded Worldwide Planning, (#EWP)/International Tax Planning and more questions answered by Michael Malloy CLU TEP RFC

Welcome. In this video, we will define the six principles of Expanded Worldwide Planning or EWP. We will also answer the third of our important questions: Will I be audited. Let us begin.

Privacy

This is a very private setting, but today intruders find many ways to invade our privacy. Our clients are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide. But as you know, it is a cat and mouse game that takes study and constant attention to detail. In this case, we don’t quite know who is winning.

Asset Protection

You don’t want this to happen to your hard earned assets. Asset protection is an integral part of an EWP Structure. EWP Structures make assets inaccessible to creditors, and thos seeking to claim them without legal authority.

The inaccessibility of this lighthouse mirrors the methods that EWP Structures use to make your assets inaccessible to creditors.

Tax Shield

A tax shield is an important EWP principle. Why pay more tax than is necessary? You can legally pay far less tax by placing your assets into an EWP Structure.

An EWP Tax Shield is very difficult to penetrate like the shells of these tortoises.

Succession Planning

Especially in jurisdictions that have forced heirship rules, Succession Planning is vital to clients. Most clients wish to distribute their assets according to their own wishes and not according to a plan that is dictated by a government agency.

EWP Succession Plans promote family harmony like the two generations depicted here.

Compliance Simplifier

The simplicity of this image reveals out straightforward approach to compliance.In today’s world attempting to hide assets only draws more attention to them. EWP Structures are compliant with the world’s tax authorities, and at the same time achieve maximum privacy.

We give you a clear path through this maze of confusing regulations.

Trust Substitute

In some jurisdictions, in particular, those that use civil law as opposed to common law, a trust substitute is essential. Why create an entity that in the end will just be ignored by tax and legal authorities?

Like the two blue eyes of this cat, EWP Structures work in both civil and common law jurisdictions.

Will I be audited?

The answer is, “Most probably, No.” To explain further we will use an analogy of cars traveling on a motorway or freeway.

On the audit questions, audits can be triggered randomly or for a variety of reasons. EWP Structures are designed to comply with all aspects of tax law worldwide. To begin our motorway analogy, where are EWP Structures positioned on this motorway?

The fast lane is for the risk takers. Traveling at every aster speeds until the inevitable occurs.

In the slow lane are those drivers who wish to travel at a leisurely pace to reach their destination.

In the middle lane are those drivers who wish to not be the fastest on the road or the slowest.

In the universe of financial planning tools, EWP Structures are traveling in the middle lane, and do not attract undue notice from tax authorities, and thus are not a likely candidate for an audit.

Conclusion

Thank you for joining us. If you found this video useful, please give us a “like” below, and click the subscribe button. In our next video, we will focus on why Private Placement Life Insurance, or PPLI for short, works so well with EWP Asset Structures. We look forward to connecting with you on future videos.

To learn how the wealthiest families in the world conduct their financial affairs, please call +1 530 692 1007, or email us at info@expandedworldwideplanning.com.

At your convenience, we can arrange a call to discuss how our unique blueprint can vastly enhance your asset structure.

Disclaimer

The opinions expressed in this video are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any financial structure, investment, or insurance product.

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

4 Essential Minutes on PPLI Series – 3

Four Essential Minutes on Private Placement Life Insurance

Part 3: Q & A

PPLI: the Ultimate Wealth Preservation Strategy

by Michael Malloy CLU TEP RFC

Our most sophisticated clients ask penetrating and very relevant questions. The three best questions that we have been asked over the years about EWP Structures are:

Is it legal?

Can they steel my money?

Will I be audited?

Here are the answers to the first two questions.

Is it legal?

This is not the entry to an EWP asset structure.

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.

Can they steal my money?

These menacing robbers won’t steal your money.

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.

Wikipedia’s article on International Tax Planning features the six principles of Expanded Worldwide Planning, or EWP for short. EWP Financial embraces these six principles in designing its asset structures.

Privacy

Asset Protection

Tax Shield

Succession Planning

Compliance Simplifier

Trust Substitute.

The United Nations Global Compact embraces another six principles that are pertinent to EWP Financial. They are the six Principles for Responsible Management Education.

Next we have some short segments that enact these six principles in a poetical form.

Values

Research

Dialogue

Method

Purpose

Partnership

Next Video

In our next video we will give you insightful knowledge on the six principles of EWP as Wikipedia presents them in their International Tax Planning article. This knowledge is absolutely essential for the asset structures of any wealthy family. We will also answer the question: Will I be audited?

If you found this video useful please give us a like and click the subscribe button. We look forward to connecting with you on future videos.

To learn how the wealthiest families in the world conduct their financial affairs, please call +1 530 692 1007, or email us at info@expandedworldwideplanning.com.

At your convenience, we can arrange a call to discuss how our unique blueprint can vastly enhance your asset structure.

Disclaimer

The opinions expressed in this video are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any financial structure, investment, or insurance product.

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

4 Essential Minutes on PPLI Series – 2

Four Essential Minutes on PPLI

PART 2

PPLI: the Ultimate Wealth Preservation Strategy

by Michael Malloy CLU TEP RFC

Welcome. In this video we continue our theme of financial architecture and how it relates to Expanded Worldwide Planning or EWP for short. EWP asset structures provide the best privacy, asset protection, and tax efficiency possible without unduly disrupting your existing financial arrangements. We are not here to replace your existing trusted business or investment advisors. Far from it. We are not out to destroy your financial home, like this.

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. Like the houses depicted here.

Would you build a custom home without an architect?

Have you constructed your financial affairs without one?

How would you know?

Wouldn’t you rather have a beautiful unified structure like this home,

Butterfly Emerging

Here we are witnessing one of nature’s most amazing events. This transformation is what occurs when we place your assets inside a Private Placement Life Insurance Policy. After this transformation, your assets will now embody the six principles of EWP that are spoken about in Wikipedia’s article on International Tax Planning. Like the butterfly your assets will now be freed from their former constraints, and can now fly with far greater privacy, asset protection, and tax efficiency. We achieve our remarkable results through our worldwide knowledge of asset structuring as expressed in our team of Regional Representatives.

Regional Representatives

Our unique approach to serving wealthy families worldwide features our seven regional representatives. Our seven regional representatives bring not only in-depth technical knowledge, but as natives of the regions that they serve, they can tailor our structures to the cultural norms of wealthy families throughout the world.

I Huai Hao: China, Portugal, Brazil

Marcia Frew: United States, Canada, Australia, New Zealand

Ingrid Claes: Europe

Georgios Georgakopoulos: Middle East, Greece, Africa

Aniuta Lasken Golob: Russia, Ukraine, CIS countries

Pilar Earl: South America, Central America, Mexico

Zhi Zhu Jones: China, Far East

Conclusion

Thank you for your interest in EWP Financial and our asset structuring techniques. In our next video we will answer three important questions. The answers to these questions explain why the world’s wealthiest families wholehearted embrace EWP asset structures.

Is it legal?

Can they steal my money?

Will I be audited?

If you found this video useful, please give us a like below and click the subscribe button. We look forward to connecting with you on future videos.

To learn how the wealthiest families in the world conduct their financial affairs, please call +1 530 692 1007, or email us at info@expandedworldwideplanning.com.

At your convenience, we can arrange a call to discuss how our unique blueprint can vastly enhance your asset structure.

Disclaimer

The opinions expressed in this video are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any financial structure, investment, or insurance product.

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

4 Essential Minutes on PPLI Series -1- Intro

Four essential Minutes on Private Placement Life Insurance

PART 1

Hello. I’m Michael Malloy, founding partner of EWP Financial. I began my career over 40 years ago as a risk management consultant. I published the Life Insurance Law Newsletter, and have written two books on Private Placement Life Insurance, PPLI: The PPLI Papers and The Wit and Wisdom of Professor PPLI.

We have three offices to serve you. Our headquarters is in New York City at 40 Wall Street. We have offices in the British Virgin Islands, and in California. This is a photograph near my office in Northern California.

EWP Financial serves wealthy families throughout the world, wherever they might reside. We offer the most advanced financial planning tools available. We assist wealthy families by structuring their assets through embracing the six principles of Expanded Worldwide Planning or EWP for short. These six principles are Privacy, Asset Protection, Tax Shield, Succession Planning, Compliance Simplifier, and Trust Substitute. We are proud that Wikipedia has chosen to feature these six principles in their article on International Tax Planning, and will be discussing them in more detail in future videos.

This is the cover of our brochure, Financial Architecture, The Comprehensive Blueprint. We will go over a few pages of the brochure together, but first let me return to the two books that I have written on Private Placement Life Insurance or PPLI for short. These books emphasize the vast asset structuring possibilities of using EWP to structure your assets. Private Placement Life Insurance is at the heart of a successful EWP asset structure. These two books go into more detail on how this works. The books are available on Amazon in both book and digital format.

This video is the first in our series entitled: Four Essential Minutes on PPLI. Here we introduce our firm, EWP Financial and why it is imperative that you use these six principles to structure your own assets.

EWP offers unparalleled advantages for: privacy, asset protection, tax shielding, succession planning, compliance simplification, and trust substitution.

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

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

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.

Thank you for your interest in EWP Financial and our asset structuring techniques. In our next video we will continue with our brochure, Financial Architect. If you found this video useful, please give us a like below. We look forward to connecting with you on future videos.

To learn how the wealthiest families in the world conduct their financial affairs, please call +1 530 692 1007, or email us at info@expandedworldwideplanning.com.

At your convenience, we can arrange a call to discuss how our unique blueprint can vastly enhance your asset structure.

Disclaimer

The opinions expressed in this video are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any financial structure, investment, or insurance product.

Contact Us for any questions you may have.

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

Expanded Worldwide Planning Interview with Joe Robert and Michael Malloy

EWP

INTERNATIONAL TAX PLANNING

INTERVIEW

Michael Malloy CLU TEP RFC & Joe Robert

“On Today’s Episode Joe speaks with Michael Malloy. Michael is going to discuss with Joe about EWP…What is EWP exactly?…. Expanded world wide planning. Michael is going to tell YOU about financial planning, asset protection, estate planning and life insurance planning. And finally how people industry and relationships are key to increasing net worth.”

 

PDF Summary

Interview Highlights – Part 1

 

Interview Highlights – Part 2

 

FULL INTERVIEW

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

EWP Stories-4

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

Download PDF

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