Fostering Discipline Is Paramount

PPLI Joins ‘Two Sides of the Same Coin’

To be thorough and open to new possibilities at the same time requires discipline: embracing ‘two sides of the same coin.’  In the PPLI structuring of wealthy international families’ assets, Advanced Financial Solutions, Inc. strives to achieve this aim. For each new case we exam similar PPLI cases that we have handled in the past. For the specific knowledge that we will need for new cases which we might lack, we have an excellent resource of professional advisors worldwide that can be easily contacted to supply this missing knowledge for a successful PPLI structure to be created.

For our analogous examples we have one from the area U.S. tax planning and how it affects U.S. beneficiaries of Foreign Grantor Trusts, and strangely enough, one from high-fashion. This example shows us what happens when the ‘two sides of the same coin’ turn out to be the same thing, and–to change this analogy–the coin loses its luster by turning out to be a copy. In a humorous vein, you can view this also as social media bringing transparency to haute couture.

Before we share the above material, we are pleased to give you this description of PPLI from International Life Insurance edited by David D Whelehan, JD in the chapter, “International Life Insurance An Overview.

“This product is for the wealthy, “accredited” investor. They are usually very large single premium structures. It is classified more as an institutional product, as the charges and fees are quite low in comparison to retail products described above. Another advantage is investment flexibility as they generally can be invested in things not permitted in a general account retail product, like hedge funds and private equity.

Premiums and benefits can also be paid in “kind,” as opposed to in cash. In addition, the policyowner can select his, or her, own Investment Manager for just the single policy to invest according to the policyowner’s general directions. The Custodian of the underlying assets in the fund can also be selected by the policyowner. Private placement products are tailored to meet specific objectives of the client, but are carefully designed to be compliant with local tax laws, so as to enjoy the tax treatment desired.”

In the STEP Journal Melvin A Warshaw and Lawrence M Lipoff discuss a key change to the US Tax Cuts and Jobs Act of 2017, and assess what it means for advisors to trustees of foreign grantor trusts. They conclude that due to recent changes in U.S. tax law that a properly structured PPLI provides an excellent solution for U.S. beneficiaries of foreign grantor trusts.

A Simpler and Safer Strategy

“In a previous two-part article,[1] we presented US tax advisors with our highly technical analysis of a key change in the foreign tax provisions of the US Tax Cuts and Jobs Act of 2017 (the Act) impacting how trustees of foreign grantor trusts (FGTs) traditionally hold US-situs portfolio assets that potentially benefit both US and non-US heirs of a non-citizen, non-resident (NCNR) of the US.”

Trustees must analyze whether their existing single foreign corporation (FC) strategy is still viable and, if not, what steps they should take to address this US tax law change. Some advisors suggest a second FC and others a two-tier or three-tier FC structure. Leaving aside that planning variations relying on different entity structures may be one option, we believe that offshore[2] private placement life insurance (PPLI) may offer a far simpler and safer strategy.

Under pre-2018 US tax law, trustees of FGTs generally relied on a single non-US holding company to shield the NCNR grantor of an FGT from US estate tax on US-situs portfolio assets. Following the death of the NCNR, the trustees would effectively eliminate this FC by filing a post-death, retroactive (so-called ‘check-the-box’) election within 30 days of such death. Gain recognition would be avoided on the historical pre-death unrealised appreciation of the US portfolio assets, prior to elimination, i.e. liquidation, of the FC, as well as pre-2018 controlled foreign corporation (Subpart F CFC) passive income tax and related tax compliance. Plus, the US heirs would achieve a basis step-up in the underlying US portfolio assets equal to their fair market value (FMV) on the date of the election.

The Act repealed the 30-day retroactive election for tax years after 2017. Under current US tax law, a post-death ‘check-the-box’ election for the trust’s FC could cause US beneficiaries of the trust to inherit the historical pre-death unrealised appreciation in the US-portfolio assets and incur cumbersome US tax compliance. Further, if an FC is a CFC for even one day during the tax year, there could be potential phantom income for the US beneficiaries of the trust now encompassing the new US ‘global intangible low taxed income’ (GILTI) regime.

Continuing a single FC

The single FC structure continues to be effective in preventing imposition of US estate tax on the US portfolio assets held by the FC. If most of the NCNR’s trust beneficiaries are US persons (citizens or residents),[3] the trustees and US advisors must anticipate that there will now be US income tax and US tax reporting on historical appreciation of the assets held in the single FC that would eventually be recognised by the US beneficiaries after the NCNR’s death. If most of the trust beneficiaries are not US persons, it may be possible that the single FC will lack sufficient beneficial ownership by US persons to qualify as a CFC.

Side-by-side FCs

Another approach suitable for families with both US and non-US persons as beneficiaries is to have the trustees of the FGT create a second FC, which would own only non-US-situs assets. The original FC would own only US securities. The non-US portfolio assets owned by the second FC would be earmarked to benefit solely non-US persons as trust beneficiaries after the death of the NCNR. The US portfolio assets owned by the existing FC would be earmarked for the US beneficiaries. There would be no US estate tax on the non-US assets owned by the second FC. A retroactive check-the-box election could be filed for this second FC effective on the day before the NCNR’s death.

Some US advisors advocate relying exclusively on entity structuring to convert a single FC into a multi-tier FC structure involving at least three FCs. Prior to the NCNR’s death, the trustees of the NCNR’s FGT would create two FCs. These two FCs would then together equally own the shares of a third lower-tier FC. The US portfolio assets would be owned by the lower-tier FC. Following the death of the NCNR, the lower- and upper-tier FCs would be deemed liquidated for US tax purposes (by filing check-the-box elections) in a carefully scripted sequence as follows.

  1. First, the upper-tier FCs would each file a check-the-box election for the lower-tier FC, effective one day prior to the death of the NCNR. This results in a taxable liquidation of the lower-tier FC without current US income tax on the historical pre-liquidation unrealised appreciation inside the FC. However, the upper-tier FCs’ basis in the underlying US securities held by the former lower-tier FC will equal the FMV of such assets on the date of the deemed liquidation of the lower-tier FC.
  2. Second, two days after the NCNR’s death, both upper-tier FCs will make simultaneous check-the-box elections. The inside basis of the US portfolio assets previously held by the lower-tier FC prior to its deemed taxable liquidation would be stepped up or down to the FMV of such assets on the day after the death of the NCNR.

Advocates of this highly complicated, carefully scripted entity structure and serial liquidation strategy for US portfolio assets indicate that, if successful, the results should be comparable to the results under prior law. However, this is not without some new tax and reporting risks, as noted above, nor does it address the question of what the independent significant non-tax business purpose for ‘each’ of the three FCs would be.

Offshore PPLI

Assuming the NCNR is insurable, advisors should seriously consider the possibility of their NCNR clients, with significant US portfolio assets, and US persons as potential beneficiaries investing in certain types of offshore PPLI policies that in turn invest in US assets.

Purchasing an offshore US tax-compliant PPLI policy will result in no US income tax recognition in the annual accretion in the cash value growth of the policy. Holding the policy until death is equivalent to receiving a US basis step-up at death on the death benefit that is payable in cash. In planning for the US beneficiaries of the NCNR, if the revocable FGT were named as owner and beneficiary of the PPLI, this trust could be structured to pour over at the death of the NCNR to a US dynasty trust organised in a low-tax jurisdiction with favourable state trust laws. This structure will ensure that the death benefit pours over to a US domestic trust that will not become subject to foreign non-grantor trust (FNGT) tax rules.

A non-admitted offshore carrier obviates CFC status for the policy and policy owner by making a certain special US tax code (s.953(d)) election to be treated as a US domestic carrier. Aside from avoiding CFC status for the policy and its owner, making this special election causes the carrier to absorb US corporate income tax and administrative costs to comply with US informational tax reporting. The hidden benefit of an offshore carrier making this special US tax election is that it enables such a carrier to claim a special deduction of reasonable reserves required to satisfy future death benefits. The offshore carrier simply absorbs the cost of US income tax compliance including its responsibility for CFC and passive foreign investment company (PFIC) reporting. There is no look-through of an insurance policy to its owner for the purposes of applying the PFIC rules. So long as the NCNR avoids any control over the selection of specific investments made by the policy owner for the policy, investor control should not be a concern.

Our conclusion is that current US tax law provides clear support for the proposition that the PFIC and CFC rules should not apply to a US tax-compliant policy issued by a foreign carrier that files a special (s.953(d)) election with the Internal Revenue Service. This will result in the tax-free inside growth in the PPLI policy that, if held until the death of the NCNR, will result in no income tax on the death benefit. We believe that purchase of an offshore PPLI policy by the NCNR through an FGT that pours over to a US dynasty trust is an efficient, safe and simple solution that allows an NCNR to invest in US portfolio assets, and leverages that investment and all subsequent growth tax-free into policy death benefit available to US beneficiaries after such death.”

From the Wall Street Journal, we share “Fashion Industry Gossip Was Once Whispered. Now It’s on Instagram” by Ray A. Smith.

“Shortly after designer Olivier Rousteing showed his fashion collection for Balmain in Paris last September, French designer Thierry Mugler posted on Instagram.

Mr. Mugler, famous in the 1980s and early ’90s for power suits and the George Michael “Too Funky” video, posted a series of side-by-side images comparing his past ensembles to Mr. Rousteing’s new looks. Next to a Balmain black, one-shouldered jacket-dress with white lapels, Mr. Mugler posted his own similar design from 1998 with the comment: “Really?”

Along with Balmain’s dress featuring a graphic, webbed print, Mr. Mugler, who now goes by the first name Manfred, attached his own webbed design from 1990. “No comment!”

The episode surprised Mr. Rousteing. “Oh my God, I’m so sorry for him, seriously,” said 33-year-old Mr. Rousteing about 69-year-old Mr. Mugler in an interview. He denied copying the designer.

In the past, copycat allegations rarely reached beyond fashion industry gossip—or sometimes courtrooms—and rarely made it to the wider public. Now with Instagram, fashion’s favorite app, accusations spread much faster and to a wider audience. Eagle-eyed accusers can post comparison pictures and add arrows and circles to zero in on the alleged offense immediately after a fashion show, now that runway images are beamed out in real time.

High-end fashion labels are increasingly being called out on social media for copying other designers or designs, leading to back-and-forth exchanges, lawsuits and expensive apologies.

Instagram accounts, including Diet Prada, have formed to focus on designers and retailers whose creations some feel look too much like other designers’ past work. Since its 2014 launch, Diet Prada, which isn’t affiliated with Prada, has amassed more than 960,000 followers. The Fashion Law blog and CashinCopy Instagram feed also name and shame copying.”

If you are looking for a bespoke solution to your asset structuring needs, we welcome you to contact us. You will also benefit from our conservative and fully compliant methodology of using PPLI as the centerpiece of the structure. You will be pleasantly surprised to experience ‘two sides of the same coin.’

 

[1] M. A. Warshaw and L. M. Lipoff, ‘How to Navigate the Choppy Seas for Foreigners With U.S.-Based Heirs: Part I’, Trusts & Estates (June 2018), and ‘Non-Citizen, Non-Resident Options for Life Insurance’, Trusts & Estates (August 2018)

[2] All uses of ‘offshore’ and ‘foreign’ are given from the perspective of the US.

[3] All references to ‘US persons’ in this article refer to citizens and residents only.

 

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

 

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PPLI AND JURISDICTIONAL ISSUES

Whose Jurisdiction Is This? Private Placement Life Insurance Defines and Simplifies

A proper understanding of jurisdictional issues is key to a successful Private Placement Life Insurance (PPLI) structure. One cannot simply take the assets of wealthy international families and move them offshore and expect a good result. The tax residence of the family is paramount, as well as the tax residence of the beneficiaries. A PPLI structure that is successful in one country, might not work in another. These factors must be thoroughly researched for the wealthy international family to have a successful PPLI structure. Since these PPLI structures tend to be long-term the necessity for this thorough research is even more compelling.

What are the areas that must be looked at to produce a successful outcome? The jurisdictional issues involved in all these areas must be addressed: tax treaties; tax laws; insurance laws; forced heirship issues, trust domicile; location of the assets; and tax reporting issues.

For our examples which illustrate jurisdictional issues, we give you one news story and excerpts from an excellent scholarly article: “GILTI: “Made in America” for European Tax Unilateral Measures, Excess Profits & the International Tax Competition Game” by  G. Charles Beller, UVA Law School, Class of 2018, Virginia Tax Review (forthcoming 2019).

As you will read our news story demonstrates how an unwanted intrusion by one jurisdiction into another can produce a very bad result. In the area of international taxation, individual countries are now competing with each other for international tax dollars. Governments are looking for a system that avoids unwanted intrusions at any level and respects the sovereignty rights of each country.

A key question posited by this article is: “How does Global Intangible Low-tax Income (GILTI), the U.S. global minimum tax on excess profits introduced with the “Tax Cuts and Jobs Act’s” (TCJA) fit into the larger debate about international tax avoidance, “harmful tax competition,” and taxation in the “digital economy”? As you will read, the article reaches a compelling new paradigm, partial developed from game theory, that could be a model for future international tax transactions.

Here are some key points from the article:

“Rather than perpetuate trans-Atlantic hostilities as Europe and the OECD consider the “digital economy,” the U.S. tax and business communities should explain how GILTI promotes beneficial competition on productive factors, discourages base erosion and profit shifting by U.S. multinationals (MNEs), and provides cover for European and other developed countries to modernize international tax rules consistent with longstanding principles of tax territoriality.

Political developments in the European Union and OECD suggest that EU member states need not feel guilty about leveraging a GILTI-esque minimum tax tool to combat the challenging issues facing international taxation in the digital age. Indeed, Germany has suggested a GILTI like minimum tax tool as part of a multilateral OECD proposal to confront challenges in taxing the “digital economy” – “a kind of BEPS 2.0” that utilizes U.S. unilateral action to facilitate multilateral cooperation.

At the heart of the controversy over GILTI, “Digital Taxation,” and the larger BEPS project is a debate about the propriety and benefits of tax competition. While tax competition is a controversial concept among economists and tax lawyers, recent scholarship provides a typology to talk productively about tax competition.

This paper draws on the theory of tax competition and language of international tax neutrality to argue that international tax policy must be viewed through the lens of “national welfare” when considering strategic incentives and thus positive predictions about nation state behavior in the international tax competition game.

Viewing tax competition and GILTI’s global minimum tax through the prism of game theory yields important insights into the potential for unilateral U.S. action to alleviate global collective action problems. An important question in evaluating GILTI is whether it enables potential cooperative behavior among developed economies through signaling and minimum standards by a sovereign with “pricing” power to set global rate and base terms for MNEs.

In short, is GILTI a harmful unilateral measures that undermines cooperative efforts in the OECD and EU? Or is GILTI like FACTA — a veiled if unsolicited gift for developed EU economies? This paper answers these questions and highlights the potential of a global minimum tax on excess profits to further debate about international taxation in a digitized economy while retaining foundational principles of tax territoriality.

Sovereignty and multilateralism have become buzzwords defining battle lines in a global debate about political ideology and international relations. International tax policy is a technical field that must skirt ideological battles and avoid aligning with “pure” multilateralism or “radical” unilateralism. While BEPS took an ideological position in arguing that cooperation stands in conflict with unilateralism, this paper shows how unilateral measures can foster beneficial cooperation in certain areas of the international tax policy.

As the FACTA/BEPS histories and GILTI parallels suggest, cooperative action is facilitated under certain scenarios through unilateral action with cooperative potential. Global minimum tax rates can operate as a sovereign cartel tool without clear efficiencies for productive factor competition or tax diversity. GILTI takes a different approach. It does not attempt to impose a global minimum tax rate by way of multilateral horse-trading. Instead, GILTI implements a resident based global minimum tax on excess profits that enables productive factor competition. Moreover, GILTI respects traditional principles of tax sovereignty and territoriality. GILTI’s resident based global minimum tax allows competing sovereigns to set their own rate and base terms. GILTI merely limits the benefit that foreign source rates confer on resident foreign profits.

As a result, GILTI’s resident global minimum tax tool shifts international tax competition away from a cat and mouse game of tracking down and labelling “tax havens” or “harmful” tax competition. Instead, the hunt for “harmful” tax competition is replaced with a productive experiment among competing sovereigns for a diverse array of resident benefits that allow domestic firms to exploit excess profits at home and abroad. Under GILTI (and similar tax tools), resident MNEs share the surplus of excess foreign profits with the resident sovereigns that make those profits possible. By enabling resident sovereigns to share in excess profits while at the same time limiting the tax benefit of foreign low tax rates, GILTI furthers productive factor competition.

As EU member states seeks to develop international tax policy for the “digital age,” productive factor competition should be a primary goal. Moreover, Europe must avoid a “two-hemisphere” mindset that targets digital tax revenues earned in the EU while dismissing identical proposals from developing countries targeting European revenues around the globe. GILTI bolsters productive factor competition while retaining the foundational principles of tax territoriality and sovereignty that protect resident firms when operating in foreign markets. That’s why GILTI is a tax tool “Made in America” for European tax.”

Our news story demonstrates a more confrontational jurisdictional dispute with a sad ending:  “American Missionary Killed by Isolated Tribe Wrote of Confrontation With the Group,” by Corinne Abrams and Rajesh Roy of the Wall Street Journal.

“As American missionary John Allen Chau sat aboard a boat near a remote Indian Ocean island known for its violent and isolated inhabitants, he wrote a message to his mother and father he made clear might be his last.

“You guys might think I’m crazy in all this but I think it’s worth it to declare Jesus to these people,” he wrote Friday. “Please do not be angry at them or at God if I get killed—rather please live your lives in obedience to whatever He has called you to and I’ll see you again.”

Within a day, Mr. Chau was missing. Five fishermen who took him to North Sentinel Island said they saw the body of someone resembling him being buried under the sand by members of the tribe that allegedly killed him.

Mr. Chau, 26, was visiting the island in India’s Andaman and Nicobar archipelago to try to spread the word of God, according to diary entries released by police.

The tribe has a long history of violent resistance to outsiders and is protected by laws that bar visitors from docking boats within 5 nautical miles (5.75 miles) of the shore.

Mr. Chau’s Instagram page shows a young man passionate about travel and new experiences. In July, he posted photos taken from a canoe and from a diving expedition with the hashtag #Andamans. Many of his posts are hashtagged #Solideogloria, the Latin phrase for Glory to God Alone.

In the journal, Mr. Chau wrote that he was on a mission to establish a kingdom of Jesus, Dependra Pathak, director general of police in the Andaman and Nicobar Islands said. Instead, he died during a “misplaced adventure in the highly restricted area,” Mr. Pathak wrote in a statement.

The islanders, part of the Sentinelese tribe whose origins date back tens of thousands of years, have a long history of hostile reactions to outsiders.

“They are very aggressive and violent. Anyone trying to access the area gets showered with arrows,” Mr. Pathak said.”

Luckily, at Advanced Financial Solutions, Inc. our job is not to decide what is right and proper for one jurisdiction in its relationships with other jurisdictions. Our job is to arrange the jurisdictional elements of PPLI structuring to achieve the best possible result for our clients. From our years of experience, this best possible result is a combination of outstanding tax savings, privacy enhancements, and asset protection benefits. We would like to help you achieve these benefits too. Please contact us with your worldwide asset structuring needs.

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

 

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How to Climb the Mountain of Happiness

PPLI Provides Steps Up the Mountain

Private Placement Life Insurance (PPLI) offers a structure that produces tax efficiency, enhanced privacy, and asset protection. In our opening quote, it can be likened to stepping up the mountain. PPLI is not a goal, but a financial structure that gives wealthy international families key elements of financial happiness.

“PPLI functions more like a trust, than a financial product.”

It is appropriate that this quote is from Confucius. For those unfamiliar with Confucius we will have a biographical sketch later on. What is also connected is Part I of a video that re-creates a presentation that I gave at The 4th FOA Family Think Tank Forum in Shanghai, China, which was held on the campus of Fu Dan University.  I was invited to speak by Ann Lee of the Wintel Law Firm in Shanghai.

The presentation is an introduction to Private Placement Life Insurance (PPLI), and the international tax planning concept of Expanded Worldwide Planning (EWP). The two-day conference was attended by attorneys, accountants, financial planners, insurance brokers, and other professionals who work with high net worth clients in China and the Far East.

First, we have a quote about PPLI from Senior Consultant, The Voice of the Investment Management Consultant.

“Private Placement Life Insurance (PPLI) is much more than an insurance policy. PPLI represents one of the most powerful vehicles available to the high net worth investor in the marketplace today.

PPLI enhances both wealth creation and wealth preservation. Wealth creation is the result of the tax-free growth of the assets in the insurance contract. Wealth preservation is a result of the death benefit paid from the insurance contract.”

Much is written about tax transparency. Many of those who champion tax transparency say that it will result in a system that is more equitable and fair. Will it result in greater happiness? The conclusion of this New York Times article, Happy ‘National Jealousy Day’! Finland Bares Its Citizens’ Taxes offers a different perspective.

“Shortly after 6 a.m. on Thursday, people began lining up outside the central office of the Finnish tax administration. It was chilly and dark, but they claimed their places, eager to be the first to tap into a mother lode of data.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp.

The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. Which tousled tech entrepreneur has sold his company? Which Instagram celebrity is, in fact, broke? Which retired executive is weaseling out of his tax liabilities?

Esa Saarinen, a professor of philosophy at Aalto University in Helsinki, described it as “a fairly positive form of gossip.”

Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. Though some complain that the tradition is an invasion of privacy, most say it has helped the country resist the trend toward growing inequality that has crept across of the rest of Europe.

“We’re looking at the gap between normal people and those rich, rich people — is it getting too wide?” said Tuomo Pietilainen, an investigative reporter at Helsingin Sanomat, the country’s largest daily newspaper. …

Roman Schatz, 58, a German-born author, rolled his eyes, a little, at Finland’s annual celebration of its own honesty. “It’s a psychological exercise,” he said. “It creates an illusion of transparency so we all feel good about ourselves: ‘The Americans could never do it. The Germans could never do it. We are honest guys, good guys.’ It’s sort of a Lutheran purgatory.” …

Economists in the United States have shown great interest in salary disclosure in recent years, in part as a way of reducing gender or racial disparities in pay.

Transparency may or may not reduce inequality, but does tend to make people less satisfied, several concluded. A study of faculty members at the University of California, where pay was made accessible online in 2008, found that lower-earning workers, after learning how their pay stacked up, were less happy in their job and more likely to look for a new one.

A study of Norway, which made its tax data easily accessible to anonymous online searches in 2001, reached a similar conclusion: When people could easily learn the incomes of co-workers and neighbors, self-reported happiness began to track more closely with income, with low earners reporting lower happiness. In 2014, Norway banned anonymous searches, and the number of searches dropped dramatically.

“More information may not be something which improves overall well-being,” said Alexandre Mas, one of the authors of the University of California report. …

One of the great sports of National Jealousy Day is to publicly shame tax dodgers.

In 2015, Mr. Pietilainen found that executives from several of Finland’s largest firms had relocated to Portugal so that they could receive their pensions tax free. His reporting caused such a stir that the Finnish Parliament terminated its tax agreement with Portugal, negotiating a new one that closed the loophole.”

Now a little about the extraordinary life of Confucius from the Simple English Wikipedia. We found this section on Confucius suited our article better than the longer Wikipedia article.

“Confucius (born 551 BC, died 478 BC) was an important Chinese educator and philosopher. His original name was Kong Qiu or Zhong Ni. As a child, he was eager to learn about everything, and was very interested in rituals. Once he grew up, he worked as a state official who handled farms and cattle. Then he became a teacher.

Confucius lived in a time when many states were fighting wars in China. This period was called the Spring and Autumn period of the Zhou Dynasty. Confucius did not like this and wanted to bring order back to society.

Like Socrates, Confucius sometimes did not answer philosophical questions himself. Instead he wanted people to think hard about problems and to learn from others, especially from history. Confucius also thought that people should get power because they were good and skilled, and not just because they came from powerful families.

Confucius wanted people to think about other people more than about money or what they owned. However he also felt that there should be strong rules in society and that people needed to obey them. Confucius thought that there were five relationships people could have, and that they all had their own rules. Two people could be

  • Prince and Subject
  • Father and Son
  • Husband and Wife
  • Elder and Child
  • or Friends

These were traditional relationships called the ‘five prototypes’. Confucius said that in all these relationships, both people must obey rules. For example, a subject must obey a prince, but also a prince must listen to a subject and must rule him well and fairly.

Confucius said that people should only do things to other people if they would be okay with other people doing those things to themselves. This is sometimes called the Golden Rule and was also taught by Jesus Christ.

His students wrote down small stories about him, and things that he said. These were put together to make a book called “The Analects.”

At Advanced Financial Solutions, Inc. the mountain that we climb is the creation of unique asset structures for wealthy international families using PPLI. We welcome you to climb this mountain with us, and achieve a structure that can give you financial happiness. Please contact us today.

 

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

 

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Tortoises Have Strong Shells

PPLI’s Tax Shield Is Even Stronger

The tax savings element of Private Placement Life Insurance (PPLI) is impressive. We invite you to reflect on your own attitudes toward tax savings by offering two articles on tax that appeared this week in the media.

The tax codes of most countries are a maze of regulations that require professional assistance to extract the most salient tax saving points.  PPLI is at the forefront of structuring techniques that take advantage of maximum tax savings, and at the same time, full compliance with the world’s tax authorities.

How does PPLI become the “leader of the pack” when it comes to tax savings?

This is summed up mostly in two words: Life Insurance. The life insurance laws in most countries are very tax friendly–one receives tax deferral for the investment component of a life insurance contract, and at the death of the insured person(s), the death benefit is passed tax-free to the beneficiary.

With PPLI you couple the life insurance component with an open architecture platform. What does this allow? This allows assets to be located almost anywhere in the world, and to have asset managers located in most jurisdictions in the world. PPLI structuring is a very powerful tool for wealthy international families, and is difficult to achieve with entity planning only–creating trusts, foundations, corporations, etc.

Now for our news articles that reveal interesting attitudes towards wealth and taxes. The first is from Bloomberg, Top 3% of U.S. Taxpayers Paid Majority of Income Taxes in 2016.

“Individual income taxes are the federal government’s single biggest revenue source. In fiscal year 2018, which ended Sept. 30, the individual income tax is expected to bring in roughly $1.7 trillion, or about half of all federal revenues, according to the Congressional Budget Office.”

Bloomberg looked into the 2016 individual returns data in detail for some additional insights illustrated in the chart below:

  • The top 1 percent paid a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent).
  • The top 50 percent of all taxpayers paid 97 percent of total individual income taxes.”

 

 

Our next article is from The New York Times, How Jared Kushner Avoided Paying Taxes.

“Jared Kushner has a net worth of almost $324 million, and his company has been profitable. But Mr. Kushner, who is President Trump’s son-in-law and senior adviser, appears to have paid almost  no federal income taxes for several years running, according to documents reviewed by The New York Times.”

The article goes on to detail Mr. Kushner’s real estate investments, and how they result in a zero tax bill.

Ironic Fact

When one combines the salient points of these two articles, it is ironic to reflect that the wealthy are the ones who both pay the most taxes, and seek to save the most taxes. When anyone prepares their income tax return, wealthy or poor, do they seek to pay the most tax or the least? Many commentators criticize wealthy individuals and corporations for not paying their fair share of taxes. But what is this fair share? Who decides what a fair share is?

Thankfully, we don’t have to answer this question. Our goal is to maximize your investment gains through strategies that minimize your worldwide tax burden. Please send us your tax concerns and questions, so we can structure a plan that gives you all the tax savings elements of PPLI. You can share your experience and inquiries at the bottom of the page. Thank you.

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

 

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McDonalds and Stray Dogs

PPLI Gives Tax Relief

Incongruities can be resolved in both form and substance with Private Placement Life Insurance (PPLI). We frequently learn best from examples that jolt our minds into new understandings. When I was running recently in the park across from my hotel in Shanghai, I saw several stray dogs playing. They were having a marvelous time frolicking about on the lawn in between the beautiful, mature trees in the park.

These dogs had no sense that they were strays and thought of by humans as just common street dogs. In the international tax arena, strangely enough McDonalds has some connection to these dogs. We will explore this further in our article, but now back to #PPLI.

PPLI is of course a specialized form of life insurance, and when used properly fulfills the definition of life insurance in all respects. When used as a structure for wealthy international families, it acts more like a trust than traditional insurance.

This can make PPLI difficult to grasp for clients and advisors. If one starts from the six principles of Expanded Worldwide Planning (EWP), PPLI is seen in its true light: an excellent structuring tool for the assets of wealthy international families.

The six principles of EWP

 

Privacy  This is a key element. With FATCA, CRS, and Registers of Beneficial Ownership our clients are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide. But as you know, it takes study and constant attention to detail to create a proper structure.

 

Tax Shield  In high tax jurisdictions, a tax shield is important. Why pay more tax than is necessary? If there is a PPLI structure than can give you a tax-free environment wouldn’t it be desired by our clients?

 

Asset Protection  Asset protection is an element that almost all clients seek. Making their assets inaccessible to former spouses, creditors, and those seeking to claim them without legal authority. An excellently crafted PPLI structure can also accomplish this for them.

 

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 wishes and not according to a plan that they don’t agree with.

 

Compliance Simplifier  In today’s world attempting to hide assets only draws more attention to them. Most clients wish to be compliant with the world’s tax authorities, and at the same time keep as much privacy as possible. Finding our way in this maze of regulations is an important element.

 

Trust Substitute  In some jurisdictions, in particular, those that use civil law as opposed to common law, a trust substitute would be useful. Why create an entity that in the end will just be ignored by tax and legal authorities? Why not have a PPLI structure that works both in civil and common law jurisdictions?

 

We will now return to McDonalds and the stray dogs. We give you a few excerpts from Paul Caron’s New York Times article, “EU Ends Inquiry Into Luxembourg’s Tax Deal With McDonald’s.

“The European Union has sparred with multinationals like Apple and Amazon as well as countries such as Ireland in its efforts to curb tax avoidance. In the case of McDonald’s, it is standing down.

The European Commission, the bloc’s executive arm, had been examining whether a deal that Luxembourg granted to McDonald’s may have led to the fast food chain’s paying less tax than it owed. The commission said Wednesday that these deals did not constitute illegal state aid.

The profits under scrutiny had not been taxed in Luxembourg or the United States, according to the commission, but it said that this was a result of a mismatch between the countries’ tax laws rather than special treatment from Luxembourg, and that no rules had been broken. Still, Margrethe Vestager, the European Union’s competition commissioner, said that it was important that Luxembourg change its laws to ensure profits do not go untaxed regularly.”

“Of course, the fact remains that McDonald’s did not pay any taxes on these profits — and this is not how it should be from a tax fairness point of view,” Ms. Vestager said in a statement. “That’s why I very much welcome that the Luxembourg government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.”

McDonald’s and the government of Luxembourg welcomed the decision from the European Commission.

“We pay the taxes that are owed and, from 2013-2017, McDonald’s companies paid more than $3 billion just in corporate income taxes in the European Union with an average tax rate approaching 29 percent,” McDonald’s said in a statement.”

After carefully following the law, albeit to its own advantage, McDonalds is now cast as a stray dog–as something common and vagrant, certainly not something to be admired. But in one sense it was just being a smart tax payer, trying to pay as little tax as possible, but still following the law. One’s attitude toward McDonalds is, of course, determined by one’s own attitudes toward what is fair and good corporate behavior. Is McDonalds to be judged poorly or judged to be a smart tax payer?

At Advanced Financial Solutions, Inc. we carefully examine the laws and regulations of all the countries of the world, seeking ways to lower your taxes using PPLI. We hope you will join our lists of satisfied clients by seeking our advice on structuring your assets.

We seek to keep you compliant with the world’s tax authorities, and at the same time pay as little tax as possible. Contact us today for a free initial consultation.

 

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

 

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Michael Malloy, CLU TEP in Motion

Travel Defined

Since our founder and chief advisor, Michael Malloy, CLU, TEP, is traveling, we will feature him this week, and a little about his trip to Singapore and Shanghai. First, let us explore the concept of travel. What are the different forms of travel that we experience in our lives?

The obvious one is going from A to B, but there are other forms of travel. Intellectual travel is paramount to working with wealthy international families. Researching and studying the different structuring options that make themselves available when the tax laws of different countries change is an ongoing form of intellectual travel for Advanced Financial Solutions, Inc.  Michael’s CLU and TEP designations are another form of intellectual travel.

According to Investopedia,

“A chartered life underwriter (CLU) is a professional designation for individuals who wish to specialize in life insurance and estate planning. Individuals must complete five core courses and three elective courses, in addition to successfully passing either 100-question, two-hour examinations in order to receive the designation.”

Wikipedia says,

“The Society of Trust and Estate Practitioners (STEP) was founded by George Tasker in 1991 and is the international professional body for advisors who specialize in inheritance and succession.”

The TEP designation is awarded to advisors who have significant involvement at a specialist level with one or more of the following: planning, creation, management of and accounting for trusts and estates, executorship administration and related taxes.

Now onto Singapore and Shanghai with Michael Malloy, CLU TEP. Michael’s time in Singapore by taken up with meetings with advisors exploring ways to use Private Placement Life Insurance (PPLI) structures for Far Eastern clients. The key six elements of Expanded Worldwide Planning (EWP) resonate well in these jurisdictions. Singapore is a truly international financial center for Indonesia, Malaysia, and the PRC.

With the implementation of The Common Reporting Standard (CRS) in the People’s Republic of China (PRC) clients are looking for ways to keep their financial affairs private and still be compliant with tax authorities. Using PPLI is seen as an excellent way to achieve this aim.  In 2019 there will also be new tax laws implemented in the PRC that impact client structures in BVI, the Cayman Islands, and other popular offshore destinations for PRC clients. In discussions with advisors in the PRC, advisors agreed that PPLI can be a valuable tool to assist clients in this area.

Intellectual travel and worldwide travel are both parts of Michael Malloy, CLU TEP’s world. Both are in service to our clients in keeping their affairs as private as possible and be compliant with the world’s tax authorities.

We invite you to explore how PPLI and EWP can greatly enhance the value of your assets. Please contact us for a free consultation to find out for yourself.

Read more about Michael Malloy.

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Positive and Beneficial Influence

PPLI Achieves Both

A Private Placement Life Insurance (PPLI) structure exerts a positive and beneficial interest on the assets which it holds. Let us examine how this is accomplished, and also what it means to exert influence. Babies and small children learn very soon how to exert influence on their parents.

I was having dinner with a five year old and his parents recently, and when the five year old ceased to be the center of the conversation, he would emphatically say, “I have something very important to tell you.” Of course, our conversation would cease and the five year old was very pleased!

PPLI achieves this benign influence over assets by employing the six key elements of Expanded Worldwide Planning (EWP). I would say that this influence is much greater than benign–it is transformative. Let us briefly state the importance of these six elements in creating a transformative PPLI policy structure.

Privacy  This is a key element. With FATCA, CRS, and Registers of Beneficial Ownership our clients are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide. But as you know, it takes study and constant attention to detail to create a proper structure.

Tax Shield  In high tax jurisdictions, a tax shield is important. Why pay more tax than is necessary? If there is a PPLI structure than can give you a tax-free environment wouldn’t it be desired by our clients?

Asset Protection  Asset protection is an element that almost all clients seek. Making their assets inaccessible to former spouses, creditors, and those seeking to claim them without legal authority. An excellently crafted PPLI structure can also accomplish this for them.

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 wishes and not according to a plan that they don’t agree with.

Compliance Simplifier  In today’s world attempting to hide assets only draws more attention to them. Most clients wish to be compliant with the world’s tax authorities, and at the same time keep as much privacy as possible. Finding our way in this maze of regulations is an important element.

Trust Substitute  In some jurisdictions, in particular, those that use civil law as opposed to common law, a trust substitute would be useful. Why create an entity that in the end will just be ignored by tax and legal authorities? Why not have a PPLI structure that works both in civil and common law jurisdictions?

In the realm of politics, lobbying government officials is a method of attempting to exert influence. There is an outcry of concern when this influence is considered undue influence, and this is defined differently throughout the world. What is lobbying in one country might be considered bribery in another country.

This article by Julie Bykowicz caught our eye this week in one of our favorite publications, The Wall Street Journal,

“The New Lobbying: Qatar Targeted 250 Trump ‘Influencers’ to Change U.S. Policy. Blockaded by Mideast neighbors, the emirate employed an unconventional lobbying campaign to win over an unconventional U.S. president.”

 

“Longtime New York restaurateur Joey Allaham visited Manhattan’s Park East Synagogue late last year with an offer for lawyer Alan Dershowitz. Come visit Doha, the capital of Qatar, by invitation of the emir.

Mr. Dershowitz says he hadn’t met Mr. Allaham before and initially demurred before agreeing to go. The professor also didn’t know he was on a list of 250 people Mr. Allaham says he and his lobbying-business partner, Nick Muzin, identified as influential in President Trump’s orbit.

The list was part of a new type of lobbying campaign Qatar adopted after Mr. Trump sided with its Persian Gulf neighbors who had imposed a blockade on the tiny nation. Qatar wanted to restore good relations with the U.S., Mr. Allaham says. Win over Mr. Trump’s influencers, the thinking went, and the president would follow.”

We look forward to lobbying on your behalf to create a PPLI structure that employs all six of the key elements of EWP.

Please let us know how we can serve you to this end. Place your comments at the end of this post and sign up to get updates.

 

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

 

 

Michael Malloy, CLU, TEP

 

 

 

 

 

Overcoming Obstacles Gracefully

Let PPLI Show the Way

Private Placement Life Insurance (PPLI) is a vehicle to overcome obstacles for structuring assets for wealthy international families. This is greatly aided by the concept of Expanded Worldwide Planning (EWP). Sometimes inspiration is necessary to overcome obstacles. To find this inspiration look no further than the remarkable life of Helen Keller. We will learn more about her amazing life later on, but first, let us focus on EWP.

We find the definition of EWP in the Wikipedia page International tax planning. Here is the opening paragraph:

International tax planning also known as international tax structures or expanded worldwide planning (EWP), is an element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.

Further explanation is given in the Principles section:

EWP allows a tax paying entity to simplify its existing structures and minimize reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and CRS. At the heart of EWP is a properly constructed Private placement life insurance (PPLI) policy that allows taxpayers to use the regulatory framework of life insurance to structure assets along the client’s planning needs.

These international assets can also comply with tax authorities worldwide. EWP also brings asset protection and privacy benefits that are set forward in the six principles of EWP below. The other elements in the EWP structure may include the client’s citizenship, country of origin, actual residence, insurance regulations of all concerned jurisdictions, tax report requirements, and client’s objectives.

Planning with trust and foundations frequently offer only limited tax planning opportunities, whereas EWP provides a tax shield. Adding a PPLI policy held by the correct entity in the proper jurisdiction creates a notable planning opportunity.

The Six Principles of EWP

To address the obstacles in structuring assets for wealthy international families, these six principles are incorporated in the solution to produce the best possible planning outcome for the family.

Privacy

Asset Protection

Succession Planning

Tax Shield

Compliance Simplifier

Trust Substitute 

The Life of Helen Keller

We return to Wikipedia for this summary of the remarkable life of Helen Keller:

Helen Adams Keller (June 27, 1880 – June 1, 1968) was an American author, political activist, and lecturer. She was the first deaf-blind person to earn a bachelor of arts degree. The dramatic depictions of the play and film The Miracle Worker made widely known the story of how Keller’s teacher, Anne Sullivan, broke through the isolation imposed by a near complete lack of language, allowing the girl to blossom as she learned to communicate. Her birthplace in West Tuscumbia, Alabama, is now a museum and sponsors an annual “Helen Keller Day”. Her birthday on June 27 is commemorated as Helen Keller Day in the U.S. state of Pennsylvania and was authorized at the federal level by presidential proclamation by President Jimmy Carter in 1980, the 100th anniversary of her birth.

Thankfully in our EWP and PPLI structuring we do not face the tremendous challenges faced and overcome so gracefully by Helen Keller. She can serve as a model for all of us for what is possible in the face of extreme difficulty. As always, we welcome your comments and questions.

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

 

 

Michael Malloy, CLU, TEP

 

 

 

 

The Rule of Law in Action

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, @ Advanced Financial Solutions, Inc

 

 

Michael Malloy, CLU, TEP

 

 

How Is Change Implemented with PPLI?

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, @ Advanced Financial Solutions, Inc

Michael Malloy, CLU TEP