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

 

 

 

Effective PPLI Real Estate Structures

Part I: Foreign Investment in U.S. Real Estate

The primary tax impediments to foreign investment in U.S. real estate in general and in real estate funds specifically are U.S. income, capital gains and withholding taxes. Adding Private Placement Life Insurance (PPLI) in combination with trusts and LLC elements eliminates or mitigates U.S., withholding taxes, U.S. income and capital gains taxes, and estate taxes.
In Part I, we discuss the obstacles that non-U.S. persons face in investing in U.S. Real Estate. In Part II, we will discuss how PPLI can greatly increase a non-U.S. investor’s return on their investment, and also simplify their reporting obligations.

Effectively Connected Income: Although non-U.S. investors’ gains from US stock are generally not taxable, income and gain from their real estate investments are generally taxable under the effectively connected income (ECI) rules. Specifically, rental income and/or gains from the sale of U.S. real estate are both generally treated as ECI. U.S. source rental income allocable to a foreign investor is typically not entitled to any treaty preferences. ECI is generally taxed to such foreign investors under the same tax rates that apply to U.S. taxpayers, and foreign investors that receive ECI are required to file US federal and state income tax returns. Finally, the FIRPTA rules described below can also transform sales of stock (or other equity interests) and/or capital gain dividends from REITs into ECI.

FIRPTA: Enacted in 1980 to combat perceived unfair advantages for foreign investors in U.S. real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) imposes significant taxes on dispositions of US real property interests. Specifically, Section 897 of the Internal Revenue Code of 1986, as amended, essentially treats such gain as ECI. In addition, as explained below, complicated withholding tax rules apply with regard to US counterparties in such transactions.

Non-US Regulatory Concerns: In addition to U.S. tax issues, non-US investors can have non-U.S. tax and regulatory concerns. For example, non-U.S. investors may need to comply with certain informational reporting requirements in their home jurisdictions.

Conclusion
Significant investment capital for U.S. real estate transactions and funds has been and will continue to be raised from non-U.S. investors. In light of this fact, it is important that real estate advisors, investors, and owners understand the tax challenges, as well as the potential solutions, involved when non-U.S. investors invest in U.S. real estate. PPLI is an integral element in these solutions.
In Part II, we will compare the various structures generally used by non-U.S. persons for investing in U.S. real estate with the addition of PPLI. Adding the PPLI advantage is a cost-effective way to give clients additional return on their investments and legitimate, enhanced privacy in their structures.

Read more about Private Placement Life Insurance, (PPLI).

We wish our many clients and advisors around the world a joyful Holiday Season, and the best possible 2018.

Your comments and questions are always welcome!

 

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