How do we achieve understanding?
Part 1
Our next five articles will comprise an in-depth look at the five main components of our PPLI Concept Map: Professor PPLI to the Rescue.
How we arrive at understanding is a process that is comprised of several steps. Since the main function of our firm, Advanced Financial Solutions, Inc., is using Private Placement Life Insurance (PPLI) to structure the assets of wealthy families, we must impart an understanding of PPLI daily. Let us examine what we do to achieve the exceptional results that we accomplish for these families in using PPLI.
First, let us look at an academic definition of understanding from Wikipedia.
“Understanding is a psychological process related to an abstract or physical object, such as a person, situation, or message whereby one is able to think about it and use concepts to deal adequately with that object. Understanding is a relation between the knower and an object of understanding. Understanding implies abilities and dispositions with respect to an object of knowledge that are sufficient to support intelligent behavior.
Understanding is often, though not always, related to learning concepts, and sometimes also the theory or theories associated with those concepts. However, a person may have a good ability to predict the behavior of an object, animal or system—and therefore may, in some sense, understand it—without necessarily being familiar with the concepts or theories associated with that object, animal or system in their culture. They may have developed their own distinct concepts and theories, which may be equivalent, better or worse than the recognized standard concepts and theories of their culture. Thus, understanding is correlated with the ability to make inferences.”
“Understanding is a relation between the knower and an object of understanding.” This is key. This “relation between the knower and an object of understanding” is something one must find out in the midst of explaining a concept like PPLI to a client. One might call the process divining their attitude towards the topic in the midst of explaining the concept to the client.
This is most readily heard in a tone of voice, and seen in body language. When a client does not understand something or his or her interest wanes, it is time to switch to another way of explaining the topic.
The advisor in our Concept Map has not given this client a satisfactory explanation of PPLI, and the client is not shy about letting him know his feelings! Perhaps this client was not given the basics of PPLI, and this is the source of his consternation.
Let us proceed to an excellent source of knowledge about PPLI that does give the basics and more, “Using Life Insurance and Annuities in U.S. Tax Planning for Foreign Clients by Leslie C. Giordani, Esq., Michael H. Ripp, Jr., Esq., and Mari M. Reed, Esq.* Giordani, Swanger, Ripp & Phillips LLP Austin, Texas from The Tax Management Journal. This article discusses the use of PPLI for non-U.S. persons from a U.S. tax perspective.
INTRODUCTION: AN ELEGANT SOLUTION TO DIFFICULT PROBLEMS
U.S. tax planning for foreign clients involves complex issues and even more complicated rules. Advanced planning can, however, provide significant opportunities for clients to minimize or avoid costly tax consequences. The issues faced by these clients include high tax liabilities associated with potential accumulation distributions from undistributed net income earned in foreign trusts and taxation of an NRA’s U.S.-source income and an NRNC’s U.S.-situated assets.
As discussed in this article, investing a foreign client’s funds in a life insurance or an annuity policy can provide an elegant solution to many of these issues and numerous additional benefits. Life insurance and, to a lesser extent, annuities have long been favored under the U.S. Internal Revenue Code. Further, life insurance and annuities can be used as: (1) estate planning tools to mitigate estate tax liability and facilitate the orderly disposition of assets at death; (2) asset security vehicles, offering both financial privacy and protection from future creditors; and (3) mechanisms to augment the philanthropic goals of charity-minded clients.
In some cases, life insurance and annuities can also reduce or defer clients’ income tax liabilities through tax-free growth inside properly structured policies and via the avoidance of taxes and penalties associated with certain distributions from foreign non-grantor trusts. Finally, investing in life insurance or an annuity contract can also ease clients’ income tax compliance burdens. This article addresses the ways in which life insurance and annuities can be employed to maximize the benefits of these powerful planning tools, focusing on ways to minimize or avoid U.S. income and transfer taxes for foreign clients. We will examine the fundamentals of life insurance and annuities including the various types of life insurance available in the marketplace and basic structuring issues relating to annuities.
We will discuss the U.S. tax rules that must be satisfied for a contract to qualify as life insurance or an annuity and, in some cases, a variable contract. We will analyze the U.S. income tax treatment and estate tax treatment of life insurance and annuities. Finally, we will discuss applications of life insurance and annuity planning to several key international estate planning topics, including the use of foreign trusts, pre-immigration planning, and the benefits of annuities for temporary U.S. residents.
Understanding Includes Trust
The process of understanding also must include some element of trust. This is mostly built over a period of time, but even at the initial client/advisor meeting this bridge must be crossed by the client for the relationship to continue.
In her excellent articles, “Notes from Caroline,” Caroline Garnham a London attorney who works with UHNW clients, gives us a story about a client that gives us an insight into the world of a UHNW client. The story reveals a certain aspect of this element of trust which is stated succinctly in the aphorism: to understand a person one must walk in the other person’s shoes. Ms. Garnham does an excellent job of describing what it is like to walk in the shoes of an UHNW client.
“George a PR agent, who acts for one of the wealthiest people in the Sunday Times Rich List, arranged to meet his client in a country golf club. George arrived at the agreed time, but still hovering above him was his client’s helicopter and it wasn’t making an approach to land. George phoned to find out why.
The client refused to land due to a charge of £95. George offered to pay – he hadn’t spent two hours travelling to a far-flung golf club only to have the meeting cancelled. The client – in a rage – refused to let him pay. This was a matter of principle. So, George had to plead with the golf club to waive its fee which it eventually did, and George’s client finally landed.
Surely the golf club should be encouraging their members to arrive by helicopter and governments should encourage the rich to live in their country, as it adds cachet to the club. By charging a fee, the club was in severe danger of losing one of their most prestigious members, purely through greed. Their thinking was if you can afford a helicopter you afford a landing fee. As in France – if you are wealthy you can pay a wealth tax. It’s like saying if you drive to the club in a Bentley you pay a parking fee, but if you arrive in a Toyota you don’t.
UHNW individuals are being fingered for money ALL THE TIME. It is hardly surprising therefore that they fly off the handle and appear difficult when they are being fleeced for yet more cash. Being pestered for money is a way of life for them, and most of them hate it, which is why they want to preserve their privacy and live in countries which appreciate their contribution.
We may watch their antics with surprise, but most of us do not know what it is like to be wealthy. However, as advisers, we need to understand them.
UHNW individuals are looking for people they can trust. But trustworthy people cannot be bought with money, because their precious quality is an attitude rather than a product. UHNWs want advisers who care for them, who see them as people rather than money mountains. Unfortunately, there are many organisations which stifle any attempt on well-meaning advisers to provide a personal service for their clients.”
One wise person said that, “We have two ears, and one mouth, because we need to listening twice as much as we speak.” It is not possible to present PPLI to a client unless one knows how they think about it. The advisor finds out by listening to what the client says and not giving a lecture.
Obviously, the understanding that we speak about has not been achieved here, so please follow us to Part 2, and find out more. We hope you enjoy this new format, and look forward to increasing your understanding about PPLI. Please contact us for a free initial consultation.
~ by Michael Malloy, CLU TEP RFC
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