Part II: EWP Chinese Case Study
Expanded Worldwide Planning (EWP) with the right fact pattern can deliver a Private Placement Life Insurance Policy (PPLI) which gives clients the control they wish. In the much discussed Webber v. Commissioner, U.S. Tax Court case, the policy issued by the offshore company had a 953(d) election, therefore, the issues of investor control and diversification were of paramount importance. What if the PPLI policy had been a non-953(d) issued PPLI policy?
For international clients with no connection to the U.S., a non-953(d) policy suits their needs perfectly. So where does that leave us on the investor control issue? It eliminates it, along with the diversification requirement under the U.S. tax code. Why? Because, if the insurance company was domiciled in Barbados, we are using the Barbados tax and insurance code. For this jurisdiction there are no investor control and diversification requirements.
Let us use a Chinese family as a case study. Mr. Lee’s wealth had been generated from steel manufacturing in China. Over the years he has used various offshore structures. Mr. Lee is now concerned with CRS and the fact than these offshore structures will now be reported to Chinese tax authorities. Using EWP and a properly structured PPLI policy, the insurance company will become the beneficial owner of the assets inside the PPLI policy.
If ties develop to the U.S. through Mr. Lee’s daughters, who are attending school in the U.S., we can also issue a 953(d) PPLI policy to benefit them and shield them from tax. By using an EWP structure, Mr. Lee and his family can keep their affairs private, tax efficient, and tax compliant.
Now back to the Webber case. The most comprehensive article on investor control, as it pertains to PPLI policies, that I have read is by Steven Horowitz. The article is impressive both in terms of the detailed analysis of investor control, and the conclusions that Mr. Horowitz reaches. We quote one of his key points below, and invite you to read the full article,
“I truly believe that the Service should have lost the case on the issue of investor control, but not because of the fact that the investor/ Taxpayer did not exercise too much control. Rather, the case should have been decided based upon the one major point of law, namely: Jeffrey T. Webber did not own the policy. The body of case law and revenue rulings, right or wrong, provides that it is the “policyholder/ owner of the contract” (See, Rev. Rul. 82-54, 1982 C.B. 11), must be the one who has exercised the excessive control over the investments within the contract. The Code provisions and historical body of tax law which govern the tax treatment of life insurance policies and annuity contracts provides in pertinent part as follows in a very clear fashion, the relevant language is as follows: the Policy Holder and owner of the contract are the parties who may not exercise an overabundance of control over the investments within the contract. As Mr. Webber was not the owner of the policy or policyholder (without application of the grantor trust rules), then the Court could not reach the conclusion that it reached without first dealing with the issue of grantor trust status (which would have made Mr. Webber the “Owner” for all federal income tax purposes), (See Rev. Rul. 85-13, 1985-1 C.B. 184).”
Most wealth owners wish structures where they maintain control of their assets. They also wish to keep their affairs private, tax efficient, and tax compliant. Using EWP and a properly structured PPLI policy, it is possible to achieve all these aims.
Please let us know how we can assist you in using these structures. Our experienced staff is here to serve you.
by Michael Malloy CLU TEP RFC, @ Advanced Financial Solutions, Inc