Foreign Investment in U.S. Real Estate

PPVA vs. a “Blocker” Corp. Structure 

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

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

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

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

 

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

 

 

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

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

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

PPVA Structuring Example

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

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

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

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

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

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

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EWP for Tomorrow’s Movers and Shakers

PPLI for International Entrepreneurs

 International tax planning is best done before fortunes are made.  Rarely does this occur.  Our firm is fortunate to have a case where Expanded Worldwide Planning (EWP) is benefiting one such person.  By consolidating his worldwide holdings, which are in the startup phase, inside a properly constructed Private Placement Life Insurance policy (PPLI), we are securing these benefits for him:

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

Our client has businesses in natural resources, sports, gaming, trading, content management, and investments.  His enterprises are in the U.S., Europe, and Africa.  He is a U.S. Green card holder with residence status in the U.K., and travels with a passport from a third country.  His startup businesses only generate $2-3MU.S. annually with outstanding potential to grow to $5-10MU.S. in just a few years.  He is a perfect candidate for EWP planning, and coming to us at the most opportune time.

When you work in a field you sometimes take things for granted that are really quite extraordinary.  This is the case here.  I was having lunch with a friend a few days ago, and told him what our firm was doing for this client.  My friend was astonished and said, “This is a perfect fit.”

If you know additional “perfect fits” please let us know, and we can accomplish the same for them.  Thank you for your continued trust and support.

 

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

 

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PFIC + subpart F + GILTI rules

PFIC + subpart F + GILTI rules = PPLI Opportunity 

A lot of acronyms to swallow!  Yes, the recently enacted U.S. tax reform legislation has been very unkind to those subject to these sections of the U.S. tax code.  Our good friend Private Placement Life Insurance (PPLI) in combination with Expanded Worldwide Planning (EWP) can soften, and in some cases, eliminate these taxes. We will discuss each of these tax rules separately, but first some basics on how you can achieve this success.

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 the U.S. context 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. PPLI companies are most frequently found in Bermuda and Barbados, and have similar very friendly client access to the funds inside the policy.

The concept of a distribution is important, because a properly structured PPLI policy can hold many different types of assets, basically anything that can be hold by a trust company. More pointedly for our short blog, passive foreign investment company (PFIC) income and subpart F income can be structured inside a PPLI policy, and, therefore, shielded from tax.

It is not in the scope of this blog to discuss the technical tax aspects of these code sections, so we refer you to an excellent article by James Meadow CA, CPA (NC), LLM (US TAX), MBA published recently in Moodys Gartner Tax Law, “The US “Transition Tax” for 2017: More Sad News for Many US Citizens Residing Abroad,”

The article discusses tax from the standpoint of how it affects U.S. persons residing outside the U.S., but gives a very clear and cogent review of how PFIC holdings and those taxed under subpart F are treated under the new U.S. legislation.

The recent legislation has brought an increase in taxation for those who have subpart F income. Thus, we encourage those in this situation to explore using PPLI.  Using PPLI to shield PFIC income has been used for many years.

Section 951A gives us GILTI

The new U.S. tax legislation gives us a new section of the tax code, Section 951A. For those who have an interest in a controlled foreign corporations (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.

We use the concept of Expanded Worldwide Planning (EWP) that allows income with unfavorable tax consequences to be reclassified as a distribution from a properly structured PPLI policy.

Your suggestions, comments, and questions are greatly appreciated. Thank you for your continued trust and support.

 

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

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PPLI + EWP = Unique Benefits

Expanded Worldwide Planning (EWP)

If a tax authority wishes to tax something, two items of concern are what type of tax to apply and was the transaction done in its jurisdiction. In our internet age this is not always so easy to clarify.  Our embrace of Expanded Worldwide Planning (EWP) makes this process of classification of tax and location simpler.

At the heart of EWP is a properly structured Private Placement Life Insurance (PPLI) policy. The assets inside this policy can be anything that can held by a trust company. These assets can also be located anywhere in the world.  While these assets are inside this PPLI policy, all tax is deferred.  At the death of the insured life/lives under the policy, these assets pass tax-free to the beneficiaries of the PPLI policy.

The news items that gave birth to our thoughts we will discuss below.  But first some more about EWP and PPLI, and how it can streamline reporting obligations to tax authorities, and bypass the need to classify the type of tax that needs to be applied to the assets. As we stated above,all tax is deferred for assets inside a properly structured PPLI policy.

Further, for reporting purposes, the insurance company becomes the beneficial owner of the assets inside the policy.  For clients not seeking to hide assets, but seeking legitimate privacy, this is an added bonus for using EWP.

What to tax and where it is located?

 Our first news item we have quoted previously, and now use it to illustrate how a new tax entity is not so easy to fit into an existing tax code that was written before this new tax entity was even invented. The taxation of property and currency occupy different sections of a tax authorities code.

 Courtesy of Mateo Jarrin Cuvi of Taxlinked.net

“Israel’s tax authorities have decided to classify Bitcoin & other cryptocurrencies as property instead of currencies. How will this affect their taxation.”

Our next quote deals with the location of the item to be taxed, and nicely illustrates how this can be challenging to governments and tax authorities.

Courtesy of Brent Kendall and Nicole Hong of the Wall Street Journal

“High Court Grapples With Case of Emails Stored Abroad”

WASHINGTON—Supreme Court justices voiced concern Tuesday that Microsoft’s resistance to U.S. search warrants for customer emails stored overseas would hamper criminal investigations, in a case that pits leading tech companies against law enforcement.

The justices were reviewing a lower-court ruling Microsoft won in 2016 that clipped the Justice Department’s authority to obtain overseas emails. The battle dates back to 2013 when the U.S. got a warrant that ordered Microsoft to hand over messages in an email account that was linked to narcotics trafficking. Microsoft argued the warrant wasn’t valid because the emails were stored in Ireland.”

Wealthy international clients are looking for simple and compliant structures that also have privacy safeguards.  Using EWP with PPLI can give this to them.  Please let us know how we can assist you further with using these unique and straightforward structures.

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

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Chinese + Investor Control + PPLI = Success

Part II: EWP Chinese Case Study

Expanded Worldwide Planning (EWP) with the right fact pattern can deliver a Private Placement Life Insurance Policy (PPLI) which gives clients the control they wish.  In the much discussed Webber v. Commissioner, U.S. Tax Court case, the policy issued by the offshore company had a 953(d) election, therefore, the issues of investor control and diversification were of paramount importance.  What if the PPLI policy had been a non-953(d) issued PPLI policy?

For international clients with no connection to the U.S., a non-953(d) policy suits their needs perfectly.  So where does that leave us on the investor control issue?  It eliminates it, along with the diversification requirement under the U.S. tax code.  Why?  Because, if the insurance company was domiciled in Barbados, we are using the Barbados tax and insurance code. For this jurisdiction there are no investor control and diversification requirements.

Let us use a Chinese family as a case study.  Mr. Lee’s wealth had been generated from steel manufacturing in China. Over the years he has used various offshore structures.  Mr. Lee is now concerned with CRS and the fact than these offshore structures will now be reported to Chinese tax authorities.  Using EWP and a properly structured PPLI policy, the insurance company will become the beneficial owner of the assets inside the PPLI policy.

If ties develop to the U.S. through Mr. Lee’s daughters, who are attending school in the U.S., we can also issue a 953(d) PPLI policy to benefit them and shield them from tax. By using an EWP structure, Mr. Lee and his family can keep their affairs private, tax efficient, and tax compliant.

Now back to the Webber case. The most comprehensive article on investor control, as it pertains to PPLI policies, that I have read is by Steven Horowitz. The article is impressive both in terms of the detailed analysis of investor control, and the conclusions that Mr. Horowitz reaches.  We quote one of his key points below, and invite you to read the full article,

“I truly believe that the Service should have lost the case on the issue of investor control, but not because of the fact that the investor/ Taxpayer did not exercise too much control. Rather, the case should have been decided based upon the one major point of law, namely: Jeffrey T. Webber did not own the policy. The body of case law and revenue rulings, right or wrong, provides that it is the “policyholder/ owner of the contract” (See, Rev. Rul. 82-54, 1982 C.B. 11), must be the one who has exercised the excessive control over the investments within the contract. The Code provisions and historical body of tax law which govern the tax treatment of life insurance policies and annuity contracts provides in pertinent part as follows in a very clear fashion, the relevant language is as follows: the Policy Holder and owner of the contract are the parties who may not exercise an overabundance of control over the investments within the contract. As Mr. Webber was not the owner of the policy or policyholder (without application of the grantor trust rules), then the Court could not reach the conclusion that it reached without first dealing with the issue of grantor trust status (which would have made Mr. Webber the “Owner” for all federal income tax purposes), (See Rev. Rul. 85-13, 1985-1 C.B. 184).”

Most wealth owners wish structures where they maintain control of their assets. They also wish to keep their affairs private, tax efficient, and tax compliant. Using EWP and a properly structured PPLI policy, it is possible to achieve all these aims.

Please let us know how we can assist you in using these structures.  Our experienced staff is here to serve you.

 

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

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Tax Compliance & Privacy Together: PPLI

Expanded Worldwide Planning (EWP) in Action

A government needs tax dollars to achieve its aims.  Many countries give their citizens, at least in their official pronouncements, a right to keep their financial affairs private.  We have conflict here.  How is this conflict resolved?

In most governmental systems throughout the world, the judicial system has the role of mediator between a government and its citizens. We will discuss two current topics in this area below.  But first, since our role is to assist private clients in navigating the difficult waters between tax compliance and privacy, a word on how we accomplish this.

We are advocates of Expanded Worldwide Planning (EWP).  EWP works to resolve the conflict outlined above. This is achieved by using a properly structured Private Placement Life Insurance (PPLI) policy.

Any asset that can be held in custody by a reputable trust company can go into the PPLI structure. Many policies are owned by trusts which can be domiciled in jurisdictions in keeping with the client’s planning needs. In terms of asset management, it is an open architecture model where the assets can be located in multiple jurisdictions with multiple asset managers.

PPLI insurance costs generally average about 1 percent of the cash value of the policy. The cost of the death benefit varies with the health and age of the insured person, and generally policies are designed with the lowest death benefit possible. Tax and enhanced privacy benefits outweigh the costs of using a PPLI structure. Asset management fees will depend on the asset manager(s) selected to manage the assets inside the policy.

Notable Current Issues on This Topic

These two important items are brought to us courtesy of the Society of Trust and Estate Practitioners (STEP).

  • Powers to issue ‘unexplained wealth orders’ against people who cannot account for their assets, as set out in the UK Criminal Finances Act 2017, will come into effect this Wednesday (31 January), the UK government has announced. A new procedure allowing the authorities to issue bank account freezing and forfeiture notices without a court order comes into force at the same time. An extended legal definition of ‘cash’, to include many kinds of physical property, will come into force on 16 April, along with a new procedure to seize, detain and forfeit it.
  • The trusts, tax structures and other banking arrangements disclosed by documents stolen from offshore law firm Appleby Global are unlikely to be examined in detail in the course of the firm’s breach of confidence litigation against the BBC and the Guardian, according to an interim judgment of the England and Wales High Court. The primary issue will be whether the defendants’ journalism was sufficiently in the public interest to outweigh the breach of confidence entailed by the hacking of Appleby’s computer system, and the subsequent leaking of its client documents to the media (Appleby v BBC and The Guardian, 2018 EWHC 104 Ch).

The first news item is striking in that the UK government has eliminated the obtaining of a court order in allowing authorities to issue bank account freezing and forfeiture orders.  We mention the second item, Appleby v BBC and The Guardian, because the issue the Court is deciding goes to the heart of all the recent leaks of private client information by news organizations and non-profits.

EWP and a properly structured PPLI policy cannot solve all your problems, but we hope we can assist in solving a few of them.  We welcome your inquiries, comments, and suggestions.

 

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

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PPLI Protects U.S. Situs Assets

Estate Tax Planning for Non-U.S. Persons

Winston Churchill’s quote is apt for many who plan for wealthy international clients. Perhaps you have had this happen to you?  You receive a call from a close relative of a client who has just purchased an apartment in their own name. This relative spends considerable time in New York City. You know that the family is now exposed to U.S. estate tax, and you have to figure out how to extricate them from this issue.

Our firm focuses on the adroit and compliant concept of Expanded Worldwide Planning (EWP).  At the heart of EWP is a properly structured Private Placement Life Insurance (PPLI) policy that allows the insurance company of the assets inside the policy to become the beneficial owner of these assets.  In many cases this gives the structure additional privacy protection as well as simplicity.

Life insurance, and this includes PPLI, is a well-recognized and well-established financial planning tool. If the overall structure is properly conceived, you have a tax efficient and compliant structure that gives tax-deferred growth to the assets inside the PPLI policy.  At the death of the insured life in the policy, a tax-free death benefit transfers the assets to, in most cases, a trust that conforms to the family’s estate planning aims.

Prior to the passage of the Trump Administration’s new tax bill, many had speculated on two key possible impacts for non-U.S. persons—the elimination of the estate tax exemption disparity between non-U.S. and U.S. persons, and the elimination of the estate tax itself, which could have eliminated a long-standing reason to use offshore structures.

On December 22, 2017, Public Law 115‑97 (“Tax Cuts and Jobs Act”) was enacted amending the estate tax for U.S. persons only. Sections 2010 and 2001, both of which apply to estates of citizens or residents, did not alter taxes imposed on the estates of nonresidents who are not U.S. citizens who hold U.S. situs assets.

Under Section 2010, the basic exclusion amount for estates of resident or citizen decedents dying after December 31, 2017, and before January 1, 2026, is increased from $5 million to $10 million. But I.R.C. Sections 2101-2108 which pertain to the “Estates of Non-Residents Not Citizens,” were not amended. Accordingly, the tax imposed on the transfer of the taxable estate of decedent nonresidents who are not U.S. citizens remains subject to a minimum basic exclusion of only $60,000.

Given the continuing taxation upon death of U.S. situs assets for those private wealth clients, care is urged in planning how those assets are held. The many and varied planning possibilities inherent in EWP can be achieved through using the correct PPLI structure.  The protection of U.S. situs assets of non-U.S. persons is just one of the many uses of EWP.

If you give us a brief fact pattern of your situation, we can let you know if EWP and PPLI are the right fit for you.  We look forward to your questions and comments.

 

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

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Domesticating a FNGT vs. Using PPLI

Why PPLI Can Be A Better Choice

When the grantor of a foreign trust dies that has U.S. beneficiaries, the trust becomes a Foreign Non-Grantor Trust, (FNGT) for U.S. tax purposes.  If distributions are then made to U.S. beneficiaries, the trust is exposed to a draconian tax regime. For our discussion, we will refer to this section of the tax code (ss665-669) as the throwback rules.

Briefly, the throwback rules are special rules that can result in adverse tax consequences when a foreign non-grantor trust earns distributable net income (DNI), which accumulates and becomes undistributed net income (UNI), before being distributed to US beneficiaries in later years.

Two common ways of dealing with this issue are domesticating the trust to a low tax jurisdiction in the U.S. like South Dakota, Nevada, or Delaware, and using a Private Placement Life Insurance (PPLI) policy to shield the trust from these significant taxes.  We will briefly discuss and contrast these two solutions.

Amidst this discussion, we will add a little levity in the form of two poems that you hopefully will find amusing and on point.

The Happy Niece

U.S. beneficiaries pay hefty tax,

Those FNGT assets get the axe.

PPLI structuring shows the way,

With a great solution to save the day.

Clients will receive a well-deserved peace,

Desired assets can even pass to their niece.

The PPLI solution is a clear winner when there are both U.S. beneficiaries and non-U.S. beneficiaries, and when there are both U.S. investments and non-U.S. investments.

If the trust is domesticated, adverse tax consequences arise when U.S. beneficiaries are attributed ownership of certain foreign assets held by the trust, such as passive foreign investment companies. The domesticated trust’s U.S. status may increase the administrative burden of establishing and maintaining banking relationships outside the U.S.  Non-U.S. beneficiaries may not find domestication the ideal solution if they would otherwise have little or no U.S. ties.

The PPLI solution does involve fees and the cost of the death benefit on the insured life in the policy.  Usually the tax and privacy advantages of using insurance outweigh these costs.  Although there are less tax benefits, using an annuity instead of life insurance reduces the costs and simplifies the transaction.

Domestication is attractive because the throwback rules have limited application to U.S. trusts.  As with the PPLI solution, domestication rarely reduces existing UNI, it prevents further accumulation of UNI. This makes sense, because undistributed income of a U.S. non-grantor trust is taxed currently, rendering moot the throwback rules’ anti-deferral purpose. Still, without additional planning tools, such as a life insurance or annuity contract, domestication generally subjects ‘domesticated’ income to current U.S. taxation, regardless of the income’s source or whether or not it is distributed.

Foreign investments within the now-domesticated US trust could also raise controlled foreign corporation and passive foreign investment company considerations, making such investments less attractive and indirectly restricting the trust’s investment universe.

Once investments are part of a properly constructed PPLI policy none of the following are treated as taxable income:

  • The income and investment returns inside the policy;
  • Withdrawals up to premium;
  • Policy loans, and;
  • Death benefit proceeds.

Therefore, these items are also not considered DNI and cannot add to the FNGT’s UNI.  Furthermore, trust assets can be used to pay the life insurance premiums on the policy, depleting the existing source of trust DNI.

Prized Relief

Pre-immigration PPLI is wise,

To guard against U.S. taxes will be your prize.

If minimizing taxes is what you conceive,

Your find reward you will surely receive.

Assets grown tax-free will be your motif,

To achieve this goal is a true relief.

Please give us your thoughts, comments, and suggestions.  We hope our brief overview brings into focus how these two methods of dealing with the throwback rules can serve you.

 

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

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Non-953(d) PPLI with U.S. Persons

Expanded Worldwide Planning (EWP) in Action

If a U.S. person is beneficiary of a Private Placement Life Insurance (PPLI) policy, is it still possible to use a non-953(d) policy and protect their interests? The answer is most definitely, “Yes.”

Further, in the context of this structure, could this U.S. person exert investor control over the policy, as it is usually interpreted by the various revenue rulings of the IRS? The answer is most definitely, “Yes.”
We will explain how this is possible in the case study that follows. Assume the following for our case study:

  • a Foreign Non-Grantor Trust (FNGT) is the owner of the policy;
  • none of the assets inside the policy have any connection to the U.S.;
  • the insured lives are all non-U.S. persons;
  • the beneficiary of the policy is the same FNGT that owns the policy. The U.S. person of the first two paragraphs above, let us call him, Carl, is a beneficiary of the FNGT.

Since the policy is issued from a non-953(d) company, the policy is not subject to the diversification requirements of 817(h), as well as the investor control regulations. If the policy is issued in Bermuda or Barbados, it qualifies as life insurance in the U.S. context, under section 101(a). At the passing of the last life in the policy, the death benefit flows income tax free, and estate tax free to Carl.

A policy owned by a non-U.S. person or entity does not need to be U.S. tax compliant under 7702(a), but under 101(a) pays a tax-free death benefit to a U.S. beneficiary.

Being a non-953(d) policy, Carl is not subject to the investor control regulations, so can be named as an investment advisor by the life insurance company. This structure was developed for Carl, so he could borrow funds from the policy to make non-U.S. real estate investments, and still have the income and estate tax efficiency of using a PPLI policy.

Expanded Worldwide Planning (EWP) Defined

Using worldwide tax codes in the best interests of clients is at the heart of EWP. The proper study of worldwide tax codes is a gold mine that creates new road maps to give clients the most private and tax efficient structures possible, and still achieve transparency with tax authorities.

Please give us a brief fact pattern, and we will be glad to structure a PPLI policy to meet your needs. This is our speciality. We are glad to share our years of structuring experience with you.

Contact Us Today!

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

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PPLI and Pre-immigration Planning

Top Three Important Factors

Pre-immigration tax planning using a properly structured PPLI policy prior to a permanent move to the U.S. can be effective in shielding the assets inside the policy from US taxation for income, gift, and estate taxes. For temporary stays in the U.S., using a Private Placement Deferred Annuity (PPDA) can be highly effective and easier to implement.

The first factor may often be overlooked: find the best immigration attorney possible. Your specific immigration status is a large factor in determining your tax status. United States immigration laws are very complex, but within their complexity lies a tremendous opportunity to live, work, study and/or invest in the US in ways that minimize US income and/or estate tax consequences as well as risk.
Often, the most evident approach to immigration is not the most desirable. For wealthy individuals and families, any discussion regarding US immigration issues should include appropriate wealth planning and tax counsel. An expert immigration attorney will be able to properly coordinate with PPLI planning to achieve the best planning result possible.

The second factor runs contrary to tax laws in most other countries: the concept of U.S. residency for Federal income tax purposes is different from that for Federal gift and estate tax purposes. This is because residence for income tax purposes is determined by reference to one’s residency while residence for estate and gift tax purposes is determined with reference to one’s domicile. Consequently, an individual can be a tax resident for income tax purposes but not for estate and gift tax purposes and vice versa.

There is currently legislation being considered in the U.S. Congress and Senate that may alter these laws, but this is the situation presently. A properly constructed PPLI policy provides tax-deferral for the assets inside the policy. In most cases, the policy passes the assets to the named beneficiary as a tax-free death benefit. PPLI is an excellent tax vehicle to create maximum tax efficiency.

NRA’s Can Use PPLI

The third factor to consider addresses an individual who is neither a resident nor a citizen of the U.S. (referred to here as a “non-resident alien” or “NRA”) who is presented with an opportunity to invest in U.S. real estate, tangible property such as art or collectibles that will be located in this country, stock of a U.S. company, or as a partner in a limited partnership or member of a limited liability company (“LLC”).

Typically, the savvy NRA investor knows what he must do to avoid being treated as a U.S. resident for income tax purposes. But, he may not be aware that these investments could attract one of the three federal transfer taxes, namely, the federal gift tax, estate tax, and generation-skipping transfer (“GST”) tax.

There are various PPLI structures that can be used to mitigate the taxation described above for the NRA. Each of these structures would be tailored to the type of investment, insurance regulations in the NRAs home country, holding period of the investment, and the timing of the liquidity event of the insured person(s).

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

 

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

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