Frozen Cash Value Unfrozen

A PPLI Policy For Today’s World

 Part 5

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 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.

 Like few profound thinkers Leonardo da Vinci was able to cross-fertilize many disciplines. To name a few art, science, aviation, engineering, music, and elaborate pageants at Italian courts. Many advisors lack knowledge of the outstanding properties of Private Placement Life Insurance (PPLI), because it is a combination of several disciplines: investing, life insurance, asset protection, and estate planning.  This inability to grasp the many planning possibilities of PPLI brings to mind this thought of Leonardo:

“Iron rusts from disuse, stagnant water loses its purity, and in cold weather becomes frozen; even so does inaction sap the vigors of the mind.”

“Cold weather becomes frozen” prefigures one of our main topics, Frozen Cash Value life insurance. Much more on this topic later.

We are also led to the overarching planning concept that informs our PPLI planning, Expanded Worldwide Planning (EWP) which embodies these six characteristics: privacy, asset protection, succession planning, tax shield, compliance simplifier, and trust substitute.

In this series, our earlier articles spoke about the advantages of using PPLI companies domiciled in locations such as Barbados, Bermuda, and other jurisdictions with insurance codes that enhance the possibilities of structuring assets with PPLI. For those with a connection to the U.S., we stressed the importance of using PPLI companies that have made a 953(d) election. We now will add a powerful third element, a PPLI policy that is termed Frozen Cash Value. This is a policy that fails to meet the IRS’s various cash value tests for code section 7702, and qualifies as life insurance under 7702(g).

Here we have a flowchart courtesy of  John Adney, Esq. Davis & Harman LLP  Brian G. King, FSA, MAAA Ernst & Young LLP  Craig R. Springfield Davis & Harman LLP, Esq. This flowchart was part of their “Life Insurance Boot Camp” presentation

History of the Frozen Cash Value Policy

 Let us start at the beginning. To my knowledge the first person to recognize the outstanding potential of using a Frozen Cash Value policy for wealthy clients was Prof. Craig D. Hampton. He called his concept The Hampton Freeze, and wrote an article by the same name in Offshore Investment, in October 1994. Here is Prof. Hampton’s account of his first client presentation using the Frozen Cash Value concept.

“I was visiting a gentleman at his home in the Piccadilly district of London. It was explained to me that his net worth exceeded US$100 million by a substantial margin. I noticed the presence of a computer terminal on a large desk in his den. It was surrounded by reams of paper dealing with offshore investing.

It soon became apparent that his affluence was due to his own efforts when he said to me: “You’re a bright young man who obviously knows his craft. But what can you tell me that I don’t already know about finances?”

I leaned forward and made this simple statement: “Through the creative use of international life insurance, your financial affairs can be arranged so that you will never have to pay income taxes for the rest of your life!” The gentleman took serious notice, and thus was born The Hampton Freeze.”

“The Freeze” Works If You’re Too Rich, Too Old, or Not in Good Health.

Frank Suess’s article, “Never again pay income taxes for the rest of your life,” in The Daily Coin, speaks further about the FCV policy.

“PPLI to this day, is an important tool in our offering. Over the years, many of our clients have employed this tool, which beyond the tax benefits, effectively integrates the benefits of legal asset protection, global investment flexibility, privacy and generational planning features.

While I am not aware of any insurance carrier, today, offering a PPLI policy called the Hampton Freeze, Prof. Hampton’s concept has certainly lived on. Since his article in 1994, a series of products has been created by the industry. These policies are generally referred to as limited cash value policies. The most commonly used product is called a Frozen Cash Value policy. So, the “Freeze” has lived on at least partially.

And, what’s most intriguing about it: It’s valid to this day! While most other effective offshore income tax planning tools have gone to the wayside over the past years, the Freeze, and the concept presented in Prof. Hampton’s article, still works.

You may now wonder how the Freeze works. I recommend you read the article. In brief, it is based on the US tax code (‘the Code’) and its articles relating to life insurance, primarily in section 7702. While ordinary PPLI policies will have their limitations when it comes to insured persons that are too old or in bad health, and no common products will be available for very large premiums, the Hampton Freeze does not know such limitations.

Let me explain in brief, without boring you with technicalities. The Code defines a number of actuarial rules regarding the cash value and the face amount of life insurance policies. They must meet certain minimum risk coverage (death benefit) levels in order to be tax-compliant.

Therefore, based on actuarial best practices and the limitations of reinsurance levels available internationally, you will not have access to the tax freedom offered if you’re too rich. In other words, the limitations of reinsurance are, internationally, at a level of roughly US$40 to US$50 million of life risk. If you’re premium is too high, you will not be able get a policy. In order to keep within the actuarial tests defined by the Code, there will not be enough re-insurance available. Thus, no policy. Equally, you will not have access to the tax freedom of PPLI if you’re in bad health. You will fail at the medical. And, you are locked out of the world of PPLI if you are too old.

The Hampton Freeze removed those limitations. Thus, the largest policies written today frequently make use of the limited cash value concept born in 1994. We too regularly make use of this planning tool. My utmost respect and gratitude to you Prof. Hampton! Good work indeed!”

To complete our history of the FCV policy, Gerald Nowotny, an excellent commentator on many aspects of PPLI, gives us this note from his article, “Frozen Cash Value Life Insurance – A sophisticated tax planning solution for ultra-high-net-worth taxpayers.”

“My experience with FCV policies goes back to 1999, when Scottish Life and Annuity offered a FCV policy. The life insurer secured a favorable opinion from a large law firm. In fact, I’ve reviewed at least four favorable opinions on FCV from large law firms over the course of the last 10 years.”

Leonardo and FCV Both Solve Important Issues

Just as a FCV policy will solve many issues facing wealthy clients today, Leonardo solved many issues during his lifetime, even before his contemporaries thought of them as issues! Here is an excerpt from Fritjof Capra’s book, Learning from Leonardo: Decoding the Notebooks of a Genius.

“Leonardo da Vinci, the great genius of the Renaissance, developed and practiced a unique synthesis of art, science, and technology, which is not only extremely interesting in its conception but also very relevant to our time.

As we recognize that our sciences and technologies have become increasingly narrow in their focus, unable to understand our multi-faceted problems from an interdisciplinary perspective, we urgently need a science and technology that honor and respect the unity of all life, recognize the fundamental interdependence of all natural phenomena, and reconnect us with the living Earth. What we need today is exactly the kind of synthesis Leonardo outlined 500 years ago.”

Commentators of tax issues frequently site 7702(g) as a catchall section of the tax code whereby policies that do not qualify under other sections of 7702 can still have the tax benefits of life insurance.

Michael Kitces’s article, “The Tax-Preferenced Treatment of Life Insurance Policies,” gives us this about 7702(g). His comments echo these commentators, but it is framed in a positive light.

“To further encourage the use of life insurance, Congress has also provided under IRC Section 7702(g) that any growth/gains on the cash value within a life insurance policy are not taxable each year (as long as the policy is a proper life insurance policy in the first place). As a result, if a permanent insurance policy is held until death, the taxation of any gains are ultimately avoided altogether; they’re not taxable under IRC Section 7702(g) during life, and neither the cash value growth nor the additional increase in the value of the policy due to death itself are taxable at death under IRC Section 101(a).”

PPLI gives wealthy families many benefits that cannot be achieved by any other type of planning. Please give us the opportunity to structure your assets to achieve these exceptional benefits. Each family situation is unique. Let us help you explore the PPLI potential of your unique situation, so you can achieve these exceptional benefits. Contact Us!

 

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

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PPLI Combines Beauty and Utility

Let Us Learn from a Master Thinker

Part 4

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 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, @ 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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How PPLI Negotiates for You

World Leaders Teach EWP

Negotiating is at the heart of Expanded Worldwide Planning (EWP), and Private Placement Life Insurance (PPLI).  What can we learn from the much publicized negotiation between Donald Trump and Kim Jong Un? One thing is obvious about this meeting.  We don’t really know much. The most substantive talks were held in private between the two leaders. As the saying goes, “After all is said and done, more is said than done.”

So what we read in the press about this negotiation is mostly speculation and conjecture, and another part is supplied by our own attitudes towards these world leaders and their countries. This is precisely what is avoided in EWP.  By using a properly structured PPLI policy, we are able to build a plan on a strong foundation of knowledge.

A good part of this solid foundation is insurance regulations. These regulations tend to be simpler and more straightforward than the tax codes of the world’s countries, and supply many key benefits that are not allowed under tax codes.

One definition of negotiating from the Wiktionary is “To succeed in coping with, or getting over something.” This is why we can say PPLI NEGOTIATES FOR YOU. It allows you to succeed using the key elements of EWP: privacy, asset protection, succession planning, tax shield, compliance simplifier, and trust substitute.

How this ability to succeed in planning for wealth international families plays out in detail depends on the particulars involved: where the family reside; the tax codes of the countries where the various family members reside; the nationalities of these family members; the assets involved; and most importantly, the tax and estate planning aims of the family.  All these elements are part of a successful EWP engagement, and what our firm enjoys most–giving families the most cost efficient and comprehensive plan possible.

History of PPLI

In the various press stories on the Trump and Kim Jong Un negotiation are historical perspectives going back to Kim’s father and grandfather. This made us realize that we have never given you a history of PPLI. Here is a short one courtesy of Trusts & Estates by Grant R. Markuson.

“PPLI really began as a way of customizing specific types of insurance products as part of corporate benefit planning for senior executives. Although the rank and file employees may have been happy with the benefits of more typical insurance offerings, senior executives often desired greater investment options, lower fees, and greater overall customization. This, in conjunction with the growing use of variable contracts, led to the birth of individualized PPLI products. The Internal Revenue Service (Service) initially ruled on these types of customized variable products in a series of Revenue Rulings from 1977-1982.

 

In the early 1990s, PPLI products for wealthy individuals surfaced again out of the Channel Islands. Soon after that, Cayman Island and Bermuda based products started to surface. As the hedge fund industry started to pick up steam during this period, many of the products were being specifically developed for these investments. In the mid 1990s, many of the major U.S. and European carriers entered the international PPLI market, which brought this type of planning back into the mainstream.”

To bring our brief history up to the present, we find a robust appetite for PPLI and EWP at present with the fast paced growth of wealthy international families throughout the world. Using PPLI and EWP at the service of these families can achieve bespoke solutions not possible with other methods of international tax planning.

We welcome the opportunity to negotiate on your behalf and reach a successful result for all concerned. Thank you for your continued trust and support. Please give us your thoughts.

 

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

 

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Privacy Flows with EWP and PPLI

GO WITH THE FLOW

“Go with the flow” can have several meanings, and oddly enough, in the context of Expanded Worldwide Planning (EWP) it can pertain to privacy.  As our firm specializes in structuring for international clients using Private Placement Life Insurance (PPLI), we will discuss two recent news articles and how they relate to securing privacy, as well as full compliance, for families involved in international tax planning. The articles are interesting in themselves, and we have used them to make a few points related to our topic.

Because PPLI is issued under a variable universal life insurance contract, the insurance company becomes the beneficial owner of the assets inside the policy.  When reporting to the tax authorities of the jurisdictions involved with the policy, the insurance company becomes the owner of the assets inside the policy, even though the assets are held in separate accounts for the benefit of the owner of the assets.  It is the goal of EWP to secure as much privacy for clients that is allowable under law, and still be fully compliant with tax authorities worldwide.

Now back to our new articles and “going with the flow.” In a certain sense, the flow of information and the flow of wealth is akin to plumbing.  As long as things flow, in the direction intended there is not a problem.  When things begin to backup or flow in the wrong direction, we encounter problems.

Our first news article discusses the movement of families within the U.S. to states with no or little state income tax, and how the states that have high state income taxes like New York and California are unprepared for the loss of these tax dollars. The point is also made in the article that the states like Florida and Texas that are receiving the migrating families are also unprepared for the influx of new people in their states. In our analogy, we have a situation here where things are flowing in a direction that is not intended.

Here are a few of the salient points courtesy  of the Wall Street Journal by Arthur B. Laffer and Stephen Moore, “So Long, California. Sayonara, New York.” 

“Since 2007 Texas and Florida (with no income tax) have gained 1.4 million and 850,000 residents, respectively, from other states. California and New York have jointly lost more than 2.2 million.”

 

“As the migration speeds up, it will raise real-estate values in low-tax states and hurt them in high-tax states.”

 

“Despite its shrinking tax base, New York spends nearly twice as much on state and local government per person ($16,000) as does economically booming Tennessee ($9,000).”

Our second news article is about the flow of information, and a possible unintended consequence of regulating it. Perhaps the pipes have been put at the wrong angles, or in the wrong place?

Again, from the Wall Street Journal by Steve Rosenbush, “The Morning Download: Europe’s New Privacy Rule, in Unexpected Twist, Helps Facebook, Google.”

The main point of the article is contained in these two quotes:

“The EU will begin enforcing the General Data Protection Regulation, “which in many cases require companies to obtain affirmative consent to use European residents’ personal information,” the Journal’s Sam Schechner and Nick Kostov report

 

“Google and Facebook, using their scale and sophistication, “are applying a relatively strict interpretation of the new law, competitors say—setting an industry standard that is hard for smaller firms to meet,” the Journal reports.”

How does our discussion of “go with the flow” pertain to the benefits of using EWP and a properly constructed PPLI policy to provide privacy?  In the first article, the families were moving to save significant tax dollars.  Inside the privacy protection of PPLI, there is a similar movement, as the assets inside the policy, if structured correctly, are in a tax-free environment.  Like the families in question, they have gone from a high tax situation to a no tax situation–if they moved to Florida and Texas where there is no state income tax.

The new privacy regulations in the second article that favor companies like Google and Facebook show how laws change over time, and when the laws change, it affects the companies subject to the regulation.  One favorable element of using PPLI for structuring is that it is subject to the insurance regulations of the tax authorities involved in the policy structure.  Insurance regulation tends to be much more simple and straightforward than tax codes, and this greatly favors families in their planning.

The insurance codes in most countries are also less subject to change than the tax codes. Insurance is also considered a vehicle that benefits the whole society. EWP structures enjoy the simplicity that insurance affords.

Our firm is here to assist you in “going with the flow” in the right direction, so please let us know your needs, and so we can find out if your situation is right for EWP and PPLI.

 

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

 

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The Pythagorean Theorem Revisited

PPLI+ Tax Treaty2  = EWP2

International tax planning must combine items from various disciplines to achieve a successful result.  We will take liberties with the Pythagorean Theorem to make our point. Tax codes do not have the exactitude of mathematical formulas, but international families must frequently combine several elements to achieve the desired results. The elements we will discuss are Private Placement Life Insurance (PPLI), Expanded Worldwide Planning (EWP), and international tax treaties.  We will have a short refresher on the Pythagorean Theorem later on, but no quiz!

In the Pythagorean Theorem once two sides are known, you can solve for the third side using the Theorem.

We wish to solve for EWP, so let us explore how tax treaties allow us to achieve a successful result in solving our equation. At the heart of EWP is a properly structured 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.

According to the Wikipedia Tax treaty page, “The stated goals for entering into a treaty often include reduction of double taxation, eliminating tax evasion, and encouraging cross-border trade efficiency. It is generally accepted that tax treaties improve certainty for taxpayers and tax authorities in their international dealings.”

At Advanced Financial Solutions, Inc., we research jurisdictions that give wealthy international families the most benefits.  Let us site an example of a Chinese family, who invests in U.S. real estate through a real estate investment advisor.  Depending on their estate planning needs, the investment advisor can create a new fund as a PPLI or a Private Placement Variable Annuity (PPVA). The policy will be owned by a foreign trust established by the family.

All of the real estate income and gains within the annuity contract will not be subject to taxation or withholding taxes under Article 17 of the U.S. –People’s Republic of China Income Tax Treaty.

Using EWP and PPLI we have provided this Chinese family, tax compliance, tax efficiency, simplified reporting, and enhanced privacy.

I know those of you who enjoy math have been waiting for the return of the Pythagorean Theorem.  Here it is in its most simple form courtesy of Margaret Patterson of Dr. Math:

So if you are told that you have a right triangle whose sides are 3 and 4,
like this:

|\
| \             Then you can use this theorem to find out what the
3 |  \ c          third side is.
|   \           3*3 + 4*4 = 9 + 16 = 25 = 5*5, so c=5
|____\
4

Our firm enjoys solving your problems, so please give us one that can be solved using EWP and PPLI. 

We appreciate your continued trust and support.

 

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

 

 

 

 

Tax History and PPLI

EWP: The Past Comes Home to the Present

 With the current emphasis on tax transparency, we will briefly examine the history of taxation and how it correlates to our specialty:  how international families can pay less tax and still be compliant with tax authorities.  Expanded Worldwide Planning (EWP) uses a properly structured Private Placement Life Insurance (PPLI) policy to achieve this aim.

We show you this beautiful image of Hatshepsut’s temple in Egypt, because the first known records of taxation occur there. Of course, the modern tax codes of our time did not exist then, nor did PPLI.

In its best sense, governments tax their citizens to pay for services that they cannot easily provide themselves like roads, fire protection, and security. With our global economy and modern freedom of movement governments are now grappling with taxation issues for families and companies that span over the entire globe, not just within their borders.

We are a proponent of EWP which solves many issues for families by creating simple structures using PPLI that give tax savings, along with tax compliance. One aspect of our structures that give families these valuable traits is in-kind premium payments.  Since we use insurance companies based in jurisdictions that accept in-kind premium payments, families can contribute their companies in lieu of the usual cash that is required.

PPLI is a bespoke product that is tailored made for families.  Many asset classes can become tax-advantaged under this worldwide, tax-favored umbrella that we craft for them.  In the U.S. it is popular to use PPLI mainly for securities, mostly ones that can generate high taxes like hedge funds.  In using EWP for international families, we use structures that are flexible and easily adaptable to the worldwide holdings of these families. Since these structures usual contain multiple asset classes like companies, valuables, and collectibles, and not just securities.

Now back to the history of taxation.  Courtesy of Wikipedia , “Tax,” and “Taxation in the United States,” we give you some interesting facts to reflect upon:

–”The first known system of taxation was in Ancient Egypt  around 3000–2800 BC in the First Dynasty of Egypt of the Old Kingdom of Egypt.”

 

–”Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on limestone flakes and papyrus.”

 

–”Effective tax rates were higher in Britain than France the years before the French Revolution, twice in per capita income comparison, but they were mostly placed on international trade. In France, taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.”

 

–”Historically, taxes on the poor supported the nobility; modern social-security systems aim to support the poor, the disabled, or the retired by taxes on those who are still working.”

 

–”The first federal income tax [in the United States] was adopted as part of the Revenue Act of 1861. The tax lapsed after the American Civil War. In 1913, the Sixteenth Amendment to the United States Constitution was ratified, permitting the federal government to levy an income tax on both property and labor.”

As the saying goes, “There is no certainty like death and taxes.”  We cannot assist you with the former, but if you are an international family and wish to explore how your holdings can become tax compliant by using PPLI, and at the same time have tax-deferral and a tax-free death benefit, we are here to assist you in this effort.

 

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

 

 

 

 

 

 

 

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, @ Advanced Financial Solutions, Inc