Part II: Outstanding Results Realized
As we discussed in Part I, foreign Investment in-bound into the United States faces many hurdles and sometimes unforeseen costs. An insurance solution using a specific life or annuity product can greatly simplify or eliminate many of these issues and make long term investing even more appealing.
All foreign Investors are exposed to a myriad of US tax consequences, including withholding taxes (30%), capital gains, and even U.S. Estate Taxes. Life insurance, and specifically Private Placement Life Insurance (PPLI), is a well-established tax and estate planning tool that many qualified investors utilize to mitigate and manage these exposures.
PPLI combines the well documented and compliant attributes of a standard life and annuity insurance product with a flexible investment platform. The flexibility includes a broad range of asset classes and employs qualifying Separately Managed Accounts (“SMAs”) or Insurance Dedicated Funds (“IDFs”).
Most structures can remain intact with the simple addition of a compliant life or annuity policy. PPLI can accommodate most custodians, managers or funds, making the transaction as simple to set up as a trust or other less effective structures.
PPLI also provides simplified reporting and confidentiality. The policy is reported once, and not the assets held or underlying investments. The owner reports a life policy and not that they are investors or hold assets in the U.S.
PPLI provides the same tax advantages of commercial life insurance:
- Tax free or tax deferred growth of internal cash value
- Tax free or tax deferred payment of death benefit
- No capital gains taxes
- No income taxes
- Ability to access Cash Value through tax free loans
- Ability to manage or mitigate estate taxes (if applicable)
The Summary Chart below compares using PPLI with other commonly used structures. The small additional expense of adding PPLI to a structure gives the non-U.S. person many additional benefits that cannot be achieved otherwise.
Summary Chart
| Trust with LLC | Dual Corporation | Individual with LLC | Insurance with IDF | |
| Capital gains tax on gain | 20% | 35% | 20% (if over $400,000, 15% if less) | 0% |
| Medicate tax at 3.8% rate | Not necessarily | No | No | 0% |
| Files tax returns in personal name | Not necessarily | No, but need to disclose foreign shareholders and related party transaction | Always | No |
| Excess interest expense carries forward to offset gain from sale. | Yes | Yes | Yes, but limited | No |
| 30% withholding tax on related party interest payments | No | Yes, unless treaty jurisdiction lender | No | No |
| Limits on deductibility of interest expense | Yes (90%) | Yes (60%) | Yes (80%) | No |
| Estate tax protection | No | Yes | No | Yes
|
| Distribution creates additional withholding | No | Yes | No | No |
Your comments and suggestions are always welcome!
Please contact us to find out if this type of structure is right for you.
by Michael Malloy CLU TEP RFC, @ Advanced Financial Solutions, Inc
