Rarity and Value

PPLI Will Take You Home

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Private Placement Life Insurance (PPLI) is a refuge in today’s stormy sea of compliance and tax regulations. When we are distraught and confused our home becomes a safe haven. This is exactly what PPLI does for the assets of wealthy international families.

The rarity of an item tends to give it value. When this item becomes the subject of theft, it can produce more interest, and, even, greater interest if the item is later recovered. This was the case recently with the ruby slippers in the American musical, fantasy film The Wizard of Oz. In the film the ruby slippers have the magically property of taking you Home.

Let us first explore how PPLI creates a safe haven for the assets of wealthy international families. This is best done by diving into the stormy sea of compliance and tax regulations. One understands a subject by the way it is framed. In this case we are speaking about intellectually framing. Let me explain further.

When we wish to go into more depth about a subject, we must first choose a source. How this source of our new knowledge presents the topic becomes part of our new understanding of the topic. This is what I mean by intellectual framing.

Politics gives us a clear example. When we read about a political event from one news source, and, then, read about the event from another news source that has a very different political perspective the two stories can sound very different indeed.

Filippo Noseda of the Mischon de Reya law firm in London is an attorney who is active in privacy issues for wealthy international families. In Trusts & Trustees, “CRS and beneficial ownership registers—what serious newspapers and tabloids have in common,” we think his framing of the privacy vs. transparent issue is excellent. We will express his viewpoint in excerpts from the article.

“The European Data Protection Supervisor (EDPS) published a damning opinion in which he decried the unclear objectives pursued by the AMLDs and, more generally, the invasive nature and lack of proportionality of the proposed registers.”

“As if they were living on planet Europa rather than in Europe, the European Parliament, the Organisation for Economic Co-operation and Development (OECD) and politicians show complete disregard for the warnings raised by their own data protection bodies and instead appear hell-bent on introducing a system of total transparency.”

“Data protection has moved to the forefront of people’s minds, prompting the EU to overhaul the existing data protection rules and has also led to a number of ground-breaking decisions by the European Court of Justice which confirms that the pendulum has started to swing back towards greater protection of privacy and data protection.”

“It is somewhat curious that serious newspapers who have been covering both the private banking scandals and the erosion of privacy seem unable to make the connection between data protection on the one hand, and the CRS and beneficial ownership registers on the other.”

In structuring assets for wealthy international families, the insurance company of the PPLI policy becomes the beneficial owner of the policy’s assets. This structure gives compliance simplification, as what is reported to tax authorities is the total of the assets inside the PPLI, and not the individual assets inside the policy.  At the death of the insured life in the PPLI policy, the assets pass as a tax-free death benefit to the beneficiaries.

Let us return to The Wizard of Oz and the ruby slippers. These magic, ruby, slippers had the property to take you Home once you clicked your heals together three times.  The slippers were stolen thirteen years ago from the Judy Garland Museum in Grand Rapids, Minnesota.  They were recently recovered by the FBI and returned to the Museum.  Of course, this publicity gave the slippers added value, and increased their rarity as something unique.

With PPLI you don’t need the ruby slippers to take you Home. You gain protection from the stormy seas of tax compliance by having your assets inside a PPLI policy, so you are Home from the beginning. You also won’t have your assets taxed, since they are inside a tax-free environment.

We invite your participation in our quest to take you Home to a truly unique structuring tool that has rarity and value. Please write your thoughts and questions at the bottom of the page. If you want to communicate privately with me don’t hesitate to drop me a line: michael@michaelmalloy.solutions

Thank you.

 

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

 

 

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How Is Change Implemented with PPLI?

Change Comes Slowly to PPLI

 Private Placement Life Insurance (PPLI) gives wealthy international families a conservative structure to achieve enhanced privacy and a tax free environment for their assets. At first glance, it would not seem that PPLI would share something in common with Ralph Lauren, the well-known fashion designer, but read on, and you will see how they are connected.

PPLI structuring is basically using available laws and regulations to the best possible advantage for each unique family situation. Why not take a “straight and narrow” route and avoid issues with the tax authorities of all the countries involved in the structure?

Life insurance is well established in the laws and regulations of most countries in the world.  It is considered a benefit to society: 

“Life insurers are vital to an efficiently functioning modern economy and society and are a key contributor to long-term economic growth and improved living standards,” states a 2016 report by The Brattle Group, “The Social and Economic Contributions of the Life Insurance Industry.”

Because life insurance permeates the social fabric at all economic levels, the laws and regulations on life insurance tend to be more stable and less subject to political change. Later on we will give you an example of how a tax law change in the U.S. is playing out in a complex manner that will take many years to fully resolve.

What are a few key elements that show us why it is vital to use life insurance in structuring for wealthy international families?  Here are two significant ones:

Simplified Reporting

A compliant PPLI policy is an asset that can hold various investments, including multiple underlying traded or non-traded companies as well as private equity. The insurance company is legally seen as the owner of these investments, hence this simplifies the reporting requirements under most reporting regimes. CRS reporting is also simplified and limited, based on correct structuring at the inception of the process.

Asset Protection

 PPLI can offer privacy and, in some cases, significant protection from creditors. Assets held in a PPLI policy are held in a Separate Account and are protected from the assets of all other policyholders and the general account of the insurance Company.

Here is our example of how a recent tax law change is playing out in the U.S.

New Hampshire Fights Supreme Court

Sales-Tax Ruling

Retailers in five states without a sales tax face new burdens

 

New Hampshire is one of five states without a broad-based statewide sales tax, a status that had insulated retailers from a task familiar to businesses elsewhere. That cushion lasted until the U.S. Supreme Court’s June decision in South Dakota v. Wayfair, which lets states require retailers to collect sales taxes even if those businesses lack a physical presence in the state.

States with sales taxes are still figuring out how they’ll approach out-of-state retailers. New Hampshire, with a special legislative session scheduled for Wednesday, isn’t waiting to respond. Its reaction to the court’s decision will spur the next round of skirmishes over cross-border sales-tax collection.

States with sales taxes are working on their regulations to get out-of-state sellers registered in their systems and collecting the tax. In some cases, they need to wait for their legislative sessions for new or revised laws.

Does all this sound familiar?  Change the actors and subject matter in the play and you have the worldwide reactions to implementing FATCA, CRS, Registers of Beneficial Ownership and other mandates from governments and regulatory bodies around the world.

Although far from timeless, our firm’s PPLI structures that use life insurance as its core element have withstood many years of changes in transparency, tax legislation, and calls from government officials to end “aggressive tax planning.” Planning with life insurance could be seen as the eye of the hurricane–an area of calm in the midst of constant change. We achieve outstanding results without being aggressive.

We thank Ralph Lauren for his quote, and enjoy the challenge of securing exceptional results that have weathered many storms. As always, we welcome your comments and questions.

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

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What Is Money?

Fungibility Is Key to PPLI

At the center of a Private Placement Life Insurance (PPLI) structure is fungibility. For PPLI this means in essence taking assets in a taxable environment into one that is tax-free. According to the Merriam-Webster dictionary, fungibility derives from the Latin verb fungi meaning “to perform (no relation to the noun “fungus” or the plural “fungi.”)

If something is fungible it is mutually exchangeable like an ounce of gold, or in other circumstances, as we will read further on in our article, the U.S. dollar held in the form of $100 bills.

This mutual exchange for a taxable environment for one that is tax-free is accomplished in PPLI by using life insurance. Perhaps a fungible transaction is not quite the right analogy.

Life insurance in the structure functions more like a membrane, where once the assets are properly structured inside the PPLI policy, the assets become recharacterized into a solution that has both outstanding tax benefits as well as enhanced privacy. Clients also can permeate this membrane for tax-free distributions on the income from the assets.

Worldwide life insurance has a tax-favored status, and this exchange from taxable to non-taxable can be accomplished with the creation of a PPLI structure that takes into account these key elements in a wealthy family’s situation:

  • Nationality of the family members;
  • Country of residence(s);
  • Location and type of assets;
  • Laws pertaining to trusts, life insurance, and other entities to be used;
  • Aims and goals of planning.

Once these elements are researched and analyzed, a tailor-made structure can be created for the family.  Wealthy international families are drawn to PPLI structures, in part, because of the legitimate enhanced privacy that can be accomplish inside this structure.

Governments and their tax authorities are in place, in the highest form, to secure the public good through the collection of taxes. Their citizens also have rights to privacy and, within the realm of law, to protect their private property from harm. Therefore, there is a built-in tension between these two aims.

Another built-in tension can occur in the financial world.  What happens when a country’s institutions don’t support a traditional banking system? One occurrence is that new systems are created to support the unique circumstances.  Let us take the extreme example of Somaliland.

For this example teaches us one of the underlying properties of what we call money: a means to facilitate a transaction. We are thankful to Matina Stevis-Gridneff in a recent Wall Street Journal article for these excerpts.

“An Isolated Country Runs on Mobile Money”

 

“HARGEISA, Somaliland—Hyperinflation and economic isolation have pushed this poor, breakaway republic closer to a virtual milestone than most other countries in the world: a cashless economy.

The continent, home to many of the world’s frontier economies, has come closest to skipping, or “leapfrogging” as it’s often called, traditional brick-and-mortar banks and going straight to heavily using phones as wallets.

And nowhere are the benefits of mobile money more apparent than in Somaliland, where the extreme economic and financial conditions have allowed Zaad, a service from the main local telecom, Telesom, to catalyze commerce in one of the most isolated parts of the world.

Once a week, Abdulahi Abdirahman hauls two bulky, heavy sacks of shillings from his gas station across Hargeisa to the money-exchange area downtown and, several hours later, returns with just a few dollar notes in his back pocket and his Zaad wallet loaded up.

Clients pay Mr. Abdirahman in Somaliland shillings. He needs to pay suppliers in dollars. Using Zaad, he gets half the payments in mobile money, meaning the cumbersome ritual has become more manageable in these times of high inflation.”

Money in Action Using PPLI

Now, again courtesy of The Wall Street Journal, by Joe Craven McGinty, we find another example of how money works in the real world.

“Cash Flow or Cash Stash? How Money Moves Around”

 

A record level of U.S. cash is circulating, but Americans aren’t spending the bulk of it.

So, where’s the money?

Up to two-thirds—or as much as $1.07 trillion—is held abroad. About $80 billion is held domestically by depository institutions. And the rest—as little as $453 billion—is in the hands of domestic businesses and individuals.

Last year, according to figures published by the Fed, $1.6 trillion was in circulation, including $1.3 trillion in $100 bills, or 80% of the total. In 1997, $458 billion circulated, including $291 billion in $100s, or 64% of the total.

The circulating currency held abroad could range from one-half to two-thirds of the total, the Fed estimates, or a range of $800 billion to $1.07 trillion.

Wealthy families worldwide have the option of creating their own unique structures using PPLI. These structures can become, in effect, private banks. By uniting PPLI with family assets and a bespoke banking relationship, much is achieved that cannot be accomplish in any other way. Please let us know how we can assist you in this endeavor. We welcome your questions and comments.

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

 

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PPLI: Life Insurance Defined

Life Insurance for International Clients

Private Placement Life Insurance (PPLI) has a clear advantage in structuring for international clients. In most countries life insurance is defined in their legal codes, and considered a well-accepted benefit for society as a whole. Life insurance is something every one either has or can provide needs justification.

In today’s world of increased tax transparency, after the enactment of FATCA and CRS, life insurance in the form of PPLI not only can give clients increased tax transparency, it can produce a structure that is simple and straightforward.

This is largely accomplished by the fact that in a properly designed PPLI structure the life insurance company becomes the beneficial owner of all the assets inside the policy, and only reports the total cash value of these assets—no other details.

In designing policies for international clients, we endeavor to find what are termed safe harbors. What are these safe harbors? They are sections of the tax codes of countries that clearly define a concept. We then model our structures so that the elements of the structure fit these clearly defined concepts. For those countries that use a common law approach in their tax codes, we are also able to find even safer harbors if case law rules favorably on the tax codes that we use as the framework of our structure.

So, if PPLI structures are able to solve the important issues of increased client privacy and a simplified tax transparent structure, it behooves us to establish a definition of life insurance. We will now give a brief history of how life insurance has been defined in the U.S. tax code, as it pertains to structuring for international clients.

Before the enactment of the Deficit Reduction Act of 1984, which created Code Section 7702, life insurance was only rudimentarily defined. At this time, the Code Section that gave the clearest definition of life insurance was Code Section 101(a), issued in 1957. The definition of life insurance hinged on some element of risk-shifting. The magnitude of the risk was not at issue.

A 1941 Supreme Court case, Helvering vs. LeGierse, concluded that “historically and commonly, insurance involves risk shifting and risk distribution.” This case gives us a definition of life insurance consistent with Code Section 101(a).

Fast forwarding to 1984 and Code Section 7702(a), life insurance is defined for U.S. federal tax purposes as a contract which is a life insurance contract “under the applicable law,” if it meets either the cash value accumulation test or the guideline premium test. Both of these tests are designed to insure a high level of pure death risk coverage relative to the amount of premium contribution. If it fails to meet either of these tests, a contract can be a valid life insurance contract under Code Section 7702(g).

Particularly for clients who are non-U.S. persons, we frequently employ a structure that comes under Code Section 7702(g), so that the least amount of life insurance can be used. This is the so-called Frozen Cash Value (FCV) PPLI policy. To further accomplish a tax-free death benefit to beneficiaries, we also look to Code Section 101(a) to define life insurance in this context.

As far as reporting to tax authorities is concerned, PPLI can mitigate or simplify reporting associated with pre-immigration planning and U.S. exposure, Controlled Foreign Corporation (“CFC”) holdings, FATCA, and CRS.

As always, we welcome your comments, questions, and a brief fact pattern to determine if our Expanded Worldwide Planning (EWP) concepts for PPLI structures can be employed successfully for you. We thank you for your continued trust and confidence.

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