PPLI AND JURISDICTIONAL ISSUES

Whose Jurisdiction Is This? Private Placement Life Insurance Defines and Simplifies

A proper understanding of jurisdictional issues is key to a successful Private Placement Life Insurance (PPLI) structure. One cannot simply take the assets of wealthy international families and move them offshore and expect a good result. The tax residence of the family is paramount, as well as the tax residence of the beneficiaries. A PPLI structure that is successful in one country, might not work in another. These factors must be thoroughly researched for the wealthy international family to have a successful PPLI structure. Since these PPLI structures tend to be long-term the necessity for this thorough research is even more compelling.

What are the areas that must be looked at to produce a successful outcome? The jurisdictional issues involved in all these areas must be addressed: tax treaties; tax laws; insurance laws; forced heirship issues, trust domicile; location of the assets; and tax reporting issues.

For our examples which illustrate jurisdictional issues, we give you one news story and excerpts from an excellent scholarly article: “GILTI: “Made in America” for European Tax Unilateral Measures, Excess Profits & the International Tax Competition Game” by  G. Charles Beller, UVA Law School, Class of 2018, Virginia Tax Review (forthcoming 2019).

As you will read our news story demonstrates how an unwanted intrusion by one jurisdiction into another can produce a very bad result. In the area of international taxation, individual countries are now competing with each other for international tax dollars. Governments are looking for a system that avoids unwanted intrusions at any level and respects the sovereignty rights of each country.

A key question posited by this article is: “How does Global Intangible Low-tax Income (GILTI), the U.S. global minimum tax on excess profits introduced with the “Tax Cuts and Jobs Act’s” (TCJA) fit into the larger debate about international tax avoidance, “harmful tax competition,” and taxation in the “digital economy”? As you will read, the article reaches a compelling new paradigm, partial developed from game theory, that could be a model for future international tax transactions.

Here are some key points from the article:

“Rather than perpetuate trans-Atlantic hostilities as Europe and the OECD consider the “digital economy,” the U.S. tax and business communities should explain how GILTI promotes beneficial competition on productive factors, discourages base erosion and profit shifting by U.S. multinationals (MNEs), and provides cover for European and other developed countries to modernize international tax rules consistent with longstanding principles of tax territoriality.

Political developments in the European Union and OECD suggest that EU member states need not feel guilty about leveraging a GILTI-esque minimum tax tool to combat the challenging issues facing international taxation in the digital age. Indeed, Germany has suggested a GILTI like minimum tax tool as part of a multilateral OECD proposal to confront challenges in taxing the “digital economy” – “a kind of BEPS 2.0” that utilizes U.S. unilateral action to facilitate multilateral cooperation.

At the heart of the controversy over GILTI, “Digital Taxation,” and the larger BEPS project is a debate about the propriety and benefits of tax competition. While tax competition is a controversial concept among economists and tax lawyers, recent scholarship provides a typology to talk productively about tax competition.

This paper draws on the theory of tax competition and language of international tax neutrality to argue that international tax policy must be viewed through the lens of “national welfare” when considering strategic incentives and thus positive predictions about nation state behavior in the international tax competition game.

Viewing tax competition and GILTI’s global minimum tax through the prism of game theory yields important insights into the potential for unilateral U.S. action to alleviate global collective action problems. An important question in evaluating GILTI is whether it enables potential cooperative behavior among developed economies through signaling and minimum standards by a sovereign with “pricing” power to set global rate and base terms for MNEs.

In short, is GILTI a harmful unilateral measures that undermines cooperative efforts in the OECD and EU? Or is GILTI like FACTA — a veiled if unsolicited gift for developed EU economies? This paper answers these questions and highlights the potential of a global minimum tax on excess profits to further debate about international taxation in a digitized economy while retaining foundational principles of tax territoriality.

Sovereignty and multilateralism have become buzzwords defining battle lines in a global debate about political ideology and international relations. International tax policy is a technical field that must skirt ideological battles and avoid aligning with “pure” multilateralism or “radical” unilateralism. While BEPS took an ideological position in arguing that cooperation stands in conflict with unilateralism, this paper shows how unilateral measures can foster beneficial cooperation in certain areas of the international tax policy.

As the FACTA/BEPS histories and GILTI parallels suggest, cooperative action is facilitated under certain scenarios through unilateral action with cooperative potential. Global minimum tax rates can operate as a sovereign cartel tool without clear efficiencies for productive factor competition or tax diversity. GILTI takes a different approach. It does not attempt to impose a global minimum tax rate by way of multilateral horse-trading. Instead, GILTI implements a resident based global minimum tax on excess profits that enables productive factor competition. Moreover, GILTI respects traditional principles of tax sovereignty and territoriality. GILTI’s resident based global minimum tax allows competing sovereigns to set their own rate and base terms. GILTI merely limits the benefit that foreign source rates confer on resident foreign profits.

As a result, GILTI’s resident global minimum tax tool shifts international tax competition away from a cat and mouse game of tracking down and labelling “tax havens” or “harmful” tax competition. Instead, the hunt for “harmful” tax competition is replaced with a productive experiment among competing sovereigns for a diverse array of resident benefits that allow domestic firms to exploit excess profits at home and abroad. Under GILTI (and similar tax tools), resident MNEs share the surplus of excess foreign profits with the resident sovereigns that make those profits possible. By enabling resident sovereigns to share in excess profits while at the same time limiting the tax benefit of foreign low tax rates, GILTI furthers productive factor competition.

As EU member states seeks to develop international tax policy for the “digital age,” productive factor competition should be a primary goal. Moreover, Europe must avoid a “two-hemisphere” mindset that targets digital tax revenues earned in the EU while dismissing identical proposals from developing countries targeting European revenues around the globe. GILTI bolsters productive factor competition while retaining the foundational principles of tax territoriality and sovereignty that protect resident firms when operating in foreign markets. That’s why GILTI is a tax tool “Made in America” for European tax.”

Our news story demonstrates a more confrontational jurisdictional dispute with a sad ending:  “American Missionary Killed by Isolated Tribe Wrote of Confrontation With the Group,” by Corinne Abrams and Rajesh Roy of the Wall Street Journal.

“As American missionary John Allen Chau sat aboard a boat near a remote Indian Ocean island known for its violent and isolated inhabitants, he wrote a message to his mother and father he made clear might be his last.

“You guys might think I’m crazy in all this but I think it’s worth it to declare Jesus to these people,” he wrote Friday. “Please do not be angry at them or at God if I get killed—rather please live your lives in obedience to whatever He has called you to and I’ll see you again.”

Within a day, Mr. Chau was missing. Five fishermen who took him to North Sentinel Island said they saw the body of someone resembling him being buried under the sand by members of the tribe that allegedly killed him.

Mr. Chau, 26, was visiting the island in India’s Andaman and Nicobar archipelago to try to spread the word of God, according to diary entries released by police.

The tribe has a long history of violent resistance to outsiders and is protected by laws that bar visitors from docking boats within 5 nautical miles (5.75 miles) of the shore.

Mr. Chau’s Instagram page shows a young man passionate about travel and new experiences. In July, he posted photos taken from a canoe and from a diving expedition with the hashtag #Andamans. Many of his posts are hashtagged #Solideogloria, the Latin phrase for Glory to God Alone.

In the journal, Mr. Chau wrote that he was on a mission to establish a kingdom of Jesus, Dependra Pathak, director general of police in the Andaman and Nicobar Islands said. Instead, he died during a “misplaced adventure in the highly restricted area,” Mr. Pathak wrote in a statement.

The islanders, part of the Sentinelese tribe whose origins date back tens of thousands of years, have a long history of hostile reactions to outsiders.

“They are very aggressive and violent. Anyone trying to access the area gets showered with arrows,” Mr. Pathak said.”

Luckily, at Advanced Financial Solutions, Inc. our job is not to decide what is right and proper for one jurisdiction in its relationships with other jurisdictions. Our job is to arrange the jurisdictional elements of PPLI structuring to achieve the best possible result for our clients. From our years of experience, this best possible result is a combination of outstanding tax savings, privacy enhancements, and asset protection benefits. We would like to help you achieve these benefits too. Please contact us with your worldwide asset structuring needs.

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

 

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Never Underestimate the Power of Persistence

PPLI Delivers Persistence

At Advanced Financial Solutions, Inc. in our quest to solve difficult client issues using Private Placement Life Insurance (PPLI) structuring, we have found that being persistent is a great benefit. Since we have clients throughout the world in diverse financial environments, our problem solving expertise is key to a successful outcome.

By way of analogy we give you an example from science. Have you ever wondered how water can travel from the roots of a tree to the top? Consider the height of coastal redwood trees in California, reaching up to 379 feet (115.5 m) in height (without the roots). Part of the solution is a persistent chain of water molecules that travel skyward to the top of these giant trees.

First let us give you some examples of being persistent in our PPLI structuring  for our clients.

Unique Solution #1

A Chinese family came to us for succession planning for offshore companies owned by the family. They wished to pass these offshore companies located in various parts of the world to their son, who is a green card holder residing in the U.S. Besides transferring the companies at the death of the wealth owner via a properly structured PPLI policy, the son wished to take the profits from the companies and invest them in real estate projects outside the U.S. We created a PPLI structure for the family that accomplished all of these aims. The PPLI structure also gave them tax-deferral on all the future revenue from the companies.

Unique Solution #2

An Israeli client who resides in Italy has a company where all the revenue is generated in Italy. He is also a U.S. green card holder, but spends very little time in the U.S. He had a Nevada company that did the processing of his customers orders which came from customers worldwide. The client wished to re-structure to lessen his U.S. tax burden which we accomplished for him using a 953(d) offshore PPLI policy.

Unique Solution #3

A young entrepreneur with worldwide holdings in sports, natural resources, gaming, and content management wishes us to check his compliance with FATCA and CRS. He is a U.S. green card holder as well as a UK resident, and citizen of an African country. He had created a dozen companies with excellent potential. We brought him into compliance with tax authorities worldwide with a PPLI structure. We gave his revenues a boost, because in the PPLI structure all the profits become tax-deferred. We protected his family with the low-cost death benefit of the PPLI policy.

We are grateful to Mark Vitosh of Iowa State University for his article in Scientific American which excellently explains how water can reach the top of the tallest trees in the world.

“There are many different processes occurring within trees that allow them to grow. One is the movement of water and nutrients from the roots to the leaves in the canopy, or upper branches. Water is the building block of living cells; it is a nourishing and cleansing agent, and a transport medium that allows for the distribution of nutrients and carbon compounds (food) throughout the tree. The coastal redwood, or Sequoia sempervirens, can reach heights over 300 feet (or approximately 91 meters), which is a great distance for water, nutrients and carbon compounds to move. To understand how water moves through a tree, we must first describe the path it takes.

Water and mineral nutrients–the so-called sap flow–travel from the roots to the top of the tree within a layer of wood found under the bark. This sapwood consists of conductive tissue called xylem (made up of small pipe-like cells). There are major differences between hardwoods (oak, ash, maple) and conifers (redwood, pine, spruce, fir) in the structure of xylem. In hardwoods, water moves throughout the tree in xylem cells called vessels, which are lined up end-to-end and have large openings in their ends. In contrast, the xylem of conifers consists of enclosed cells called tracheids. These cells are also lined up end-to-end, but part of their adjacent walls have holes that act as a sieve. For this reason, water moves faster through the larger vessels of hardwoods than through the smaller tracheids of conifers.

Both vessel and tracheid cells allow water and nutrients to move up the tree, whereas specialized ray cells pass water and food horizontally across the xylem. All xylem cells that carry water are dead, so they act as a pipe. Xylem tissue is found in all growth rings (wood) of the tree. Not all tree species have the same number of annual growth rings that are active in the movement of water and mineral nutrients. For example, conifer trees and some hardwood species may have several growth rings that are active conductors, whereas in other species, such as the oaks, only the current years’ growth ring is functional.

This unique situation comes about because the xylem tissue in oaks has very large vessels; they can carry a lot of water quickly, but can also be easily disrupted by freezing and air pockets. It’s amazing that a 200 year-old living oak tree can survive and grow using only the support of a very thin layer of tissue beneath the bark. The rest of the 199 growth rings are mostly inactive. In a coastal redwood, though, the xylem is mostly made up of tracheids that move water slowly to the top of the tree. Now that we have described the pathway that water follows through the xylem, we can talk about the mechanism involved. Water has two characteristics that make it a unique liquid. First, water adheres to many surfaces with which it comes into contact. Second, water molecules can also cohere, or hold on to each other. These two features allow water to be pulled like a rubber band up small capillary tubes like xylem cells.

Water has energy to do work: it carries chemicals in solution, adheres to surfaces and makes living cells turgid by filling them. This energy is called potential energy. At rest, pure water has 100 percent of its potential energy, which is by convention set at zero. As water begins to move, its potential energy for additional work is reduced and becomes negative. Water moves from areas with the least negative potential energy to areas where the potential energy is more negative. For example, the most negative water potential in a tree is usually found at the leaf-atmosphere interface; the least negative water potential is found in the soil, where water moves into the roots of the tree. As you move up the tree the water potential becomes more negative, and these differences create a pull or tension that brings the water up the tree.

A key factor that helps create the pull of water up the tree is the loss of water out of the leaves through a process called transpiration. During transpiration, water vapor is released from the leaves through small pores or openings called stomates. Stomates are present in the leaf so that carbon dioxide–which the leaves use to make food by way of photosynthesis–can enter. The loss of water during transpiration creates more negative water potential in the leaf, which in turn pulls more water up the tree. So in general, the water loss from the leaf is the engine that pulls water and nutrients up the tree.

How can water withstand the tensions needed to be pulled up a tree? The trick is, as we mentioned earlier, the ability of water molecules to stick to each other and to other surfaces so strongly. Given that strength, the loss of water at the top of tree through transpiration provides the driving force to pull water and mineral nutrients up the trunks of trees as mighty as the redwoods.”

In some ways we are taught to see scientific processes like this as an inevitable result of something–something ordinary. But an inevitable result of what? That is the point. From another perspective, it is the inevitable result of something miraculous. Let us call it the miraculous persistence of nature.

Advanced Financial Solutions, Inc. enjoys being persistent in finding PPLI structuring solutions for our worldwide client base. Please contact us for a unique solution to your asset structuring needs.

We invite you to put our persistency to the test!

 

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

 

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Time On Your Side

PPLI Produces Longevity Through Time

The stability of Private Placement Life Insurance (PPLI) in structuring assets for wealthy international families is a creation of how we look at the element of time. PPLI relies on the laws and regulations of insurance. These laws and regulations in most countries have been in effect for a longer period of time and are less subject to change than the tax codes in these countries.

When a new trend emerges frequently people line up on either side of the topic: some being in favor and others opposing this new trend. One such new trend for wealthy international families are the various citizenship by investment programs that are being offered by many countries. We will explore this trend, but first more on the workings of how PPLI can assist in the structuring of assets.

How does the element of time enter the picture? How does it add the stability that is currently being sought in the whirlwind of change brought about by FATCA, CRS, and the Registers of Beneficial Ownership?

This topic came into the light when I was reading a book that used first person interviews with various subjects to make certain points. I found the interviews lacked depth. Not particularly because they were poorly conducted, but just the fact that when you meet someone for the first time it is not the same experience as knowing a person for a long time.

In other words, one cannot form a deep, lasting friendship with someone unless one has known this person over some longer period of time. We can call this aspect of time duration or longevity. This aspect of time produces in us a certain feeling of comfort, much like returning to a habitual routine after a period of absence from it.

When we structure the assets of a family, we wish to bring them the comfort of having–Time On Your Side: knowing that the next generation will inherit assets through a tax-free PPLI death benefit. This is accomplished by using the time-tested body of insurance laws and regulations throughout the world.

The Economist article, “Selling citizenship is big business–and controversial,”  is in part disparaging of citizenship by investment programs because they are relatively new phenomenon, and somewhat outside the regulation of individual governments. Here are a few excerpts:

“To meet the demand for long-term visas and passports, more and more countries are flaunting their attractions. About 100 offer a “residence by investment” programme. Over a dozen offer citizenship—including five Caribbean island-states, Vanuatu, Jordan and, within the EU, Austria, Cyprus and Malta.”

 

“The industry, however, is under a cloud. It is suspected of commercialising and trifling with rights and privileges that patriots regard as sacred; and of making life easier for crooks and terrorists.”

 

“For the European Union in particular, the issue is delicate. It touches on one of the most “national” of competences—who lives in a country and bears its passport—yet has Union-wide consequences. An EU-member-country’s passport is also an EU passport; a “Schengen” visa grants access to 22 EU members and four other countries.”

 

“Both the EU and the OECD, a club of rich countries, are looking leerily at CRBI schemes. Later this year, the European Commission, the EU’s executive, is to publish a report on those offered by EU members. The industry fears the worst.”

 

At Advanced Financial Solutions, Inc. we are eager to put Time On Your Side, and hope you will take advantage of our many PPLI structuring programs that operate worldwide. Please let us know how we can help you achieve your aims in the area of privacy and tax minimization.

 

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

 

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The Rule of Law in Action

PPLI Brings Ultimate Sophistication

Private Placement Life Insurance (PPLI) brings the words of Leonardo da Vinci to life:

“Simplicity is the ultimate sophistication.”

The transformation from simplicity to sophistication can be accomplished through the rule of law. In our PPLI work for wealthy international families, we must frequently turn complex and sometimes contradictory tax laws into a simple, understandable, and workable structure.

Detailed analysis of the laws that govern the nationalities and residences of the family members must be undertaken. We welcome this challenge and enjoy the process. This thorough and meticulous study is highly individual to each family, so our short article is not the appropriate place to give a detailed example. Further on, we will bring you some humorous and not-so-humorous news stories on the rule of law.

There are always three elements in a PPLI policy: the owner of the policy, usually a trust; the life or lives insured; and the beneficiary of the PPLI policy’s death benefit. The domicile of each of these three elements must be studied. The domicile of each of these elements of the PPLI policy might be different, and a misinterpretation of the laws that affect each could lead to a wrong result in structuring for the family.

We diligently pursue this study. We frequently adjust the PPLI structure to make the elements work for the family, ensuring compliance with all the tax authorities involved. The rule of law also has its light side too. As we read in this recent Wall Street Journal article, by Josh Jacobs and Matthew Dalton. What we find humorous is not the present-day rodent situation in Paris, but the legal argument put forward in the 16th century when France was faced with a similar problem.

In France, Even the Rats Have Rights

Rodents overrunning Paris have defenders who say the varmint has a right

 to inhabit the City of Lights too.

‘Rat-Prochement’

PARIS—Rats were popping up at supermarkets, parks and nurseries when a city official convened a crisis meeting last fall to discuss ways to cull the population.

That was the first time Geoffroy Boulard, mayor of the 17th arrondissement in northwestern Paris, realized the rodents are backed by a vocal lobby. Ten protesters stepped forward to denounce exterminators’ plans to poison the animals. They urged a more humane method: Deploy birth-control drugs.

In the Middle Ages, people were helpless to stop the creatures from invading pantries and destroying crops. Lacking effective poisons, authorities took to bringing legal charges against rats for their misdeeds, according to “The Criminal Prosecution and Capital Punishment of Animals,” a lengthy history by E.P. Evans.

The rats weren’t defenseless in such cases. When an ecclesiastical court in Autun, France, brought charges in the 16th century against a group of rats for destroying the local barley crop, a well-known lawyer named Bartholomew Chassenée was appointed by the court to represent them. Mr. Chassenée mounted a vigorous response.

“He urged, in the first place,” Mr. Evans wrote, “that inasmuch as the defendants were dispersed over a large tract of country and dwelt in numerous villages, a single summons was insufficient to notify them all.”

Now a more serious issue that relates to the families that we serve from the website of the international law firm, Mishcon de Reya.

Legal challenge to Common Reporting Standard

(CRS) and Beneficial Ownership (BO) registers

Mishcon de Reya has taken legal steps against the Common Reporting Standard (CRS) and the Beneficial Ownership registers to call into question the wider repercussions for fundamental rights and the relationship between individuals and the State.

Our contention is that the publication of sensitive data concerning the internal governance and ownership of private companies by the Beneficial Ownership Registers is not necessary to achieve the stated objectives.  Similarly, we believe that the exchange of information under the CRS is excessive, as information is exchanged indiscriminately and affects all account holders regardless of the size of the account.

Our firm is dedicated to putting the rule of law to the best use for our PPLI clients. We invite you to join our group of satisfied, wealthy, international families by contacting us today.

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

 

 

Michael Malloy, CLU, TEP

 

 

The 80/20 Rule

The 20% Is Yours With PPLI

In terms of structuring assets for wealthy international families, Private Placement Life Insurance (PPLI) puts you at the top of your class.  What is top of your class? Let us apply the 80/20 rule.

Wikipedia gives us a brief history of the 80/20 rule.

The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.

Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who noted the 80/20 connection while at the University of Lausanne in 1896, as published in his first work, Cours d’économie politique.

Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population.

It is an axiom of business management that “80% of sales come from 20% of clients”. Richard Koch authored the book, The 80/20 Principle, which illustrated some practical applications of the Pareto principle in business management and life.

Expanded Worldwide Planning (EWP) is the overarching principle that our firm embraces that is becoming a new model for those who structure the assets of wealthy international families. If we define success as the 20% part of the 80/20 equation, what are these characteristics that assist in this success:

  • 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.

80/20 In Action

According to a recent report on CNBC, just three stocks are responsible for most of the market’s gain this year.  Amazon, Netflix, and Microsoft together are responsible for 71% of S & P 500 returns and for 78% of NASDAQ 100 returns.  Not quite 80/20, but the principal is there.

Now let see how the 80/20 plays out more personally in our daily lives. If you have had the experience of working closely with a group of people over a long period of time, you find out their strengths and weakness and your own. 

You find that that some do things well in some areas and not so well in others–and if you are honest with yourself–this applies to observations about yourself too.  So if we take the 80/20 rule as our guide, we are grouped into the 80% part or the 20% part, depending on the task or character trait that we are measuring.

Our firm must conduct diligent research to achieve the aims of the families that approach us for PPLI structuring. We must find the best possible way to give them the tax and enhanced privacy benefits that they seek. Our goal at the end of our research, is to place the family in the 20% part of the equation.

We wish to elevate you to the 20% through our rigorous and thorough PPLI structuring process. We invite you to contact us today so we can begin the process now.

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

 

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A Great Dance Couple: EWP & Trust

“Dancing Cheek to Cheek”

The films of Fred Astaire and Ginger Rogers in the 1930’s and 1940s had some sensational dance routines.  The dance couple of Expanded Worldwide Planning (EWP) and a Trust are poised for equally sensational steps in the realm of planning for wealthy international families.

Our firm specializes in just this brand of choreography: using a properly structured Private Placement Life Insurance (PPLI) in combination with an excellently drafted Trust.  We capitalize Trust(s), because there is a large variety to choose from in international tax planning, and the selection depends on the nationality of the family members, their jurisdictions of domicile, the passports they carry, the location of their assets, and all the various countries’ laws that impact these items.

At the heart of EWP is a properly structured Private Placement Life Insurance (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.

A trust can be used in connection with other planning to lessen taxes, but by itself does not automatically confer tax advantages. For example, a trust cannot pass assets as a tax-free death benefit to future generations, as a PPLI policy can do.

For those jurisdictions in the world that recognize trust, there are innumerable techniques used by wealthy international families that favor the use of a trust.

Many advisors who draft trusts miss the opportunity of “dancing cheek to cheek” by not incorporating PPLI policies in conjunction with their trust planning.

Trust and Insurance Comparison

●    Contractually based and used by millions ●    Provides some asset protection
●    Tax deferral ●    Sometimes seen as tool for the rich
●    Insurance company is beneficial owner ●    Requires “trustee” with full control
●    Simplified or limited reporting ●    More stringent reporting requirements
●    Potentially tax free ●    Tax filings for trust and possibly beneficiaries required in some jurisdictions
●    No capital gains tax ●    Limited or not direct tax deferral on payouts
●    No trustee  
●    Asset protection  

In most civil law jurisdictions, trusts are poorly acknowledged and trust law is not well developed. This can create obstacles for those domiciled in these civil law jurisdictions that have created foreign trusts. However, in certain circumstances, a PPLI structure can circumvent these problems and achieve the planning aims one would more commonly be able to fulfill with a trust in a common law jurisdiction.

Our well-rehearsed team of advisors can truly teach you some new dance steps, that partner EWP with trusts, so “Let’s Dance.”

 

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

 

 

 

 

 

 

PPLI and Cryptocurrency–Together A Winner

Expanded Worldwide Planning (EWP) Embraces Change

Properly structured Private Placement Life Insurance (PPLI) gives the assets inside the policy tax deferred growth for the life of the policy.  When the insured life/lives under the policy pass on, the assets pass as a tax-free death benefit to the beneficiaries under the policy.  If some of the assets inside the policy are cryptocurrencies, they also receive this tax-advantaged treatment. Essentially PPLI is more of an income tax and estate tax planning tool than it is a product.  Many asset classes are supported in an open architecture EWP structure.

We will discuss some more basics on structuring with PPLI in the context of EWP, then, something more on how cryptocurrencies and PPLI both occupy a similar space on the international scene for wealthy clients.

Any asset that can be custodied by a reputable trust company can go into the PPLI structure. Many policies are owned by trusts which can be domiciled in jurisdictions in keeping with the client’s planning needs. In terms of asset management, it is an open architecture model where the assets can be located in multiple jurisdictions with multiple asset managers. PPLI insurance costs generally average about 1 percent of the cash value of the policy, over the life of the policy.

The cost of the death benefit varies with the health and age of the insured person, and generally policies are designed with the lowest death benefit possible. Tax and enhanced privacy benefits outweigh the costs of using a PPLI structure. Asset management fees will depend on the asset manager(s) selected to manage the assets inside the policy. The policy is fully transparent to the client, as all fees and costs are disclosed.

How are cryptocurrency, EWP, and PPLI similar? All three have qualities that a wealthy homeowner would be looking for in an ideal home: architectural elements that truly “speak” to the owner; privacy; a climate that suits the owner; and a sense of security, both emotional and physical. These may seem like strange bedfellows, but what we all seek in the world, whether it is a home or a structure for our financial affairs, can be quite similar in nature.

We will illustrate this point by a few recent news items about cryptocurrencies:

Courtesy of Anne Kadet in The Wall Street Journal.

“NewYorkCoin, created in 2014 by an unknown developer, has enjoyed a surge of support in recent months. More businesses are accepting the currency and there’s a growing interest among cryptocurrency developers. There’s even a new Meetup group where enthusiasts who frequent online forums can gather in person to discuss their altcoin adventures.”

We all enjoy having a local identify and simultaneously having the sense of belonging to something larger than ourselves.  The NewYorkCoin, EWP, and PPLI have these characteristics.  The open architectural elements of EWP and PPLI can incorporate both the local and international in a structure that speaks to the client’s individual planning needs.

Courtesy of Mateo Jarrin Cuvi of Taxlinked.net.

“Israel’s tax authorities have decided to classify Bitcoin & other cryptocurrencies as property instead of currencies. How will this affect their taxation?”

We are not qualified to comment on the taxation issue, but wish to use this invitation post comments to raise a salient point: the use of blockchain technology as the basis for a currency throws into question the very nature of what constitutes a currency.  Or put another way, in the future will currency continued to be issued by governments or by individuals?  The answer to this question is being played out currently on the world stage.  In the meantime, if you are concerned about the tax on cryptocurrencies, you can use a properly structured PPLI policy to shield the tax.

For some readers we may have stretched some analogies, but hopefully we have equally stretched your minds on our topics.  We appreciate your comments and are thankful for your continued trust and support.

 

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

 

 

 

 

 

PPLI Protects U.S. Situs Assets

Estate Tax Planning for Non-U.S. Persons

Winston Churchill’s quote is apt for many who plan for wealthy international clients. Perhaps you have had this happen to you?  You receive a call from a close relative of a client who has just purchased an apartment in their own name. This relative spends considerable time in New York City. You know that the family is now exposed to U.S. estate tax, and you have to figure out how to extricate them from this issue.

Our firm focuses on the adroit and compliant concept of Expanded Worldwide Planning (EWP).  At the heart of EWP is a properly structured Private Placement Life Insurance (PPLI) policy that allows the insurance company of the assets inside the policy to become the beneficial owner of these assets.  In many cases this gives the structure additional privacy protection as well as simplicity.

Life insurance, and this includes PPLI, is a well-recognized and well-established financial planning tool. If the overall structure is properly conceived, you have a tax efficient and compliant structure that gives tax-deferred growth to the assets inside the PPLI policy.  At the death of the insured life in the policy, a tax-free death benefit transfers the assets to, in most cases, a trust that conforms to the family’s estate planning aims.

Prior to the passage of the Trump Administration’s new tax bill, many had speculated on two key possible impacts for non-U.S. persons—the elimination of the estate tax exemption disparity between non-U.S. and U.S. persons, and the elimination of the estate tax itself, which could have eliminated a long-standing reason to use offshore structures.

On December 22, 2017, Public Law 115‑97 (“Tax Cuts and Jobs Act”) was enacted amending the estate tax for U.S. persons only. Sections 2010 and 2001, both of which apply to estates of citizens or residents, did not alter taxes imposed on the estates of nonresidents who are not U.S. citizens who hold U.S. situs assets.

Under Section 2010, the basic exclusion amount for estates of resident or citizen decedents dying after December 31, 2017, and before January 1, 2026, is increased from $5 million to $10 million. But I.R.C. Sections 2101-2108 which pertain to the “Estates of Non-Residents Not Citizens,” were not amended. Accordingly, the tax imposed on the transfer of the taxable estate of decedent nonresidents who are not U.S. citizens remains subject to a minimum basic exclusion of only $60,000.

Given the continuing taxation upon death of U.S. situs assets for those private wealth clients, care is urged in planning how those assets are held. The many and varied planning possibilities inherent in EWP can be achieved through using the correct PPLI structure.  The protection of U.S. situs assets of non-U.S. persons is just one of the many uses of EWP.

If you give us a brief fact pattern of your situation, we can let you know if EWP and PPLI are the right fit for you.  We look forward to your questions and comments.

 

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

 

 

 

 

 

Effective PPLI Real Estate Structures-2

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, @ Advanced Financial Solutions, Inc