Let Us Learn from a Master Thinker
Part 4
Our next few articles will comprise an in-depth look at the five main components of our PPLI Concept Map: Professor PPLI meets Leonardo da Vinci.
Professor PPLI has landed, and repeats Leonardo da Vinci’s phrase, “Can’t beauty and utility be combined.” In a sense, Leonardo’s whole life was dedicated to these words. At Advanced Financial Solutions, Inc. we strive to follow in Leonardo’s footsteps in creating PPLI structures for wealthy families that give the best possible combination of privacy, tax savings, and compliance with tax authorities worldwide.
Let us first explore beauty. Beauty has many levels. At the highest level beauty embodies our finest aspirations. On a more mundane level, it comes closer to what makes us experience joy in our everyday lives.
Those of us who create Private Placement Life Insurance (PPLI) asset structures for wealthy clients can find beauty in a well-designed structure that is implemented successfully to achieve the aims of privacy, asset protection, and tax reduction. It is a type of architecture or engineering that uses laws, concepts, and ideas and blends them with the family dynamic and country specific challenges of each highly individual case.
George Santayana, the influential 20th century thinker, gives us his famous definition of beauty from The Sense of Beauty.
“We have now reached our definition of beauty, which, in the terms of our successive analysis and narrowing of the conception, is value positive, intrinsic, and objectified. Or, in less technical language, Beauty is pleasure regarded as the quality of a thing. … Beauty is a value, that is, it is not a perception of a matter of fact or of a relation: it is an emotion, an affection of our volitional and appreciative nature. An object cannot be beautiful if it can give pleasure to nobody: a beauty to which all men were forever indifferent is a contradiction in terms. … Beauty is therefore a positive value that is intrinsic; it is a pleasure.”
The PPLI Reality Check
We all know what one person or cultural might call lovely and beautiful does not always translate to another culture. We see this when we travel to countries that have cultures, traditions, and objects quite different than our own.
This idea mirrors the many different ways that PPLI is implemented throughout the world. What works in one country, or set of circumstances, does not work in another. Through research into the tax codes and insurance regulations of all the countries and entities involved must be commenced at the very beginning of each PPLI case that comes to us.
In Part 3 of our Concept Map we made no mention of the fairy who introduced the topic of beauty. Hans Christian Andersen, the great Danish writer of fairy tales tells us, “The most wonderful fairy tales grow out of that which is reality.”
This embodies the reverse of what happens at Advanced Financial Solutions, Inc. When you first come and tell us what you wish to gain by using our services, all the facts are somewhat a fairy tale, in that we don’t know if our type of structuring will work for you. Only after a detailed review of your situation, can we say with confidence, if it achieves the “reality” of a proper PPLI structure.
This detailed review, or reality check, is done at no cost to you. We wish to partner with you on a truly bespoke PPLI structure that achieves as many of the elements of Expanded Worldwide Planning, EWP as possible. These elements are privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.
Details of the 953(d) Election
Now, as we promised you in Part 3, here is more detail on the 953(d) election. What is the difference between foreign and domestic insurance? In this context, we are speaking about U.S. based insurance companies as the domestic ones.
Domestic life insurance is state regulated in the U.S.. Policyholders and carriers can transact and negotiate only in the state where the carrier is licensed. The choice of investments is relatively limited, often in-house company funds only, with associated higher costs, sometimes much higher. Commissions can represent a fairly large proportion of the paid-in premium.
Foreign life insurance is regulated by the jurisdiction of the country of domicile. i.e., that countries’ financial regulator. Investment risk for variable policies is borne solely by the policyholder. The policyholder has much more flexible options, the cost of insurance is significantly much lower as the policyholder pays just the pure re-insurance cost, and brokers are paid a small percentage fee, similar to an asset management fee. In short, tax deferral remains assured, asset protection is tighter, privacy is greater, costs are lower, investment flexibility is greater and its fully compliant. At the private banking level, offshore insurance is a no-brainer.
The “953(d)” Insurance Company
The 953(d) refers to Section 953(d) of the U.S. Internal Revenue Code (IRC). This is the section that allows a non-U.S. Insurance Company to make the election to be treated as a U.S. taxpayer. This election provides some very material benefits to both insurance company and policyholders.
As a U.S. taxpayer, the insurance company can invest in assets located anywhere in the world, including the U.S. and Europe. Through the policy structure, the policyholder and/or the beneficiaries can legally defer income tax and capital gains tax. Assets within the policy are paid to the beneficiaries as a tax free death benefit when the insured passes. Regardless of the location of those assets; U.S., Europe, Asia, the insurance company does not engage in trade and business in the U.S. and is not subject to state insurance laws.
Tax
The “953(d)” insurance company pays U.S. federal income tax on its worldwide income, it has therefore a US tax ID number, a “TIN”. Moreover the policyholder is exempt from the 1% federal excise tax on premium payments as the company is treated as domestic, plus there is no state insurance premium tax. There is no withholding tax on U.S. source dividend income. There is a U.S. DAC tax that must be paid, but it is lower than the 1% FET, currently it is 70 basis points.
For the policyholder and beneficiaries, the insurance structure itself can be used to optimize income, capital gains and estate tax planning. Additionally, there is no withholding tax on U.S. investments as the company is U.S. person with a completed W-9 form.
Legal & Compliance
The “953(d)” insurance company is treated as a domestic corporation by the U.S. government for tax purposes. The insurance company (not the policyholder) completes and submits the W-9 form to the bank facilitating compliance with U.S. domestic custodians and paying agents. This makes the 35% withholding tax under FATCA a non-issue. The company is not subject to state or federal insurance law being an offshore provider. Finally, there is no requirement to file and maintain form 720.
Combining Beauty and Utility
How did Leonardo combine beauty and utility? One need go no further than his notebooks. In her New Yorker review of Walter Isaacson’s biography of Leonardo da Vinci, “The Secret Lives of Leonardo da Vinci,” Claudia Roth Pierpont conveys beautifully the magic of Leonardo’s notebooks.
“These drawings are part of a vast treasury of texts and images, amounting to more than seven thousand surviving pages, now dispersed across several countries and known collectively as “Leonardo’s notebooks”—which is precisely what they were.
Private notebooks of all sizes, some carried about for quick sketches and on-the-spot observations, others used for long-term, exacting studies in geology, botany, and human anatomy, to specify just a few of the areas in which he posed fundamental questions, and reached answers that were often hundreds of years ahead of his time. Why is the sky blue? How does the heart function? What are the differences in air pressure above and beneath a bird’s wing, and how might this knowledge enable man to make a flying machine? Music, military engineering, astronomy. Fossils and the doubt they cast on the Biblical story of creation.
“Describe,” he instructs himself, “what sneezing is, what yawning is, the falling sickness, spasm, paralysis, shivering with cold, sweating, fatigue, hunger, sleep, thirst, lust.” He intended publication, but never got around to it; there was always something more to learn. In the following centuries, at least half the pages were lost. What survives is an unparalleled record of a human mind at work, as fearless and dogged as it was brilliant.”
We attempt to be fearless and dogged in pursuit of the perfect PPLI structure for you. Please let us know how we can serve you to this end. Thank you for your continued trust and support.
by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc
#michaelmalloy #PPLI #privateplacement #lifeinsurance #advancedfinancialsolutions
