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 RFC, @ Advanced Financial Solutions, Inc

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Jurisdictions Are Key to Non-953(d) Policies

PPLI: Two Sides of One Face, Part II

Understanding the jurisdictions where wealthy international families operate is essential to Expanded Worldwide Planning (EWP). EWP is the over-arching philosophy of our firm’s planning. In Part I of our topic we explored the using a 953(d) compliant PPLI policy. Here we will discuss some uses of the non-953(d) PPLI policy, and how its increased flexibility can solve many planning issues.

Sometimes we tie our blog to a current topic in the news, and this week is no exception. “U.S. on Course to Land on European Tax Blacklist: EU Official” is what caught our eye. The article is by Joe Kirwin courtesy of Bloomberg.

What the OECD finds objectionable in the U.S., can be accomplished using a non-953(d) PPLI policy, and still be fully compliant. This is the case even if the U.S. were to fully acquiesce to the OECD’s objections, and change its existing regulations.  More on this below.

We will illustrate our points with an example. Mr. LeGrand is a wealthy entrepreneur with several companies that operate outside the U.S. He wishes to pass these companies to his daughter, Angela, who resides in the U.S. Mr. LeGrand also wishes to give Angela access to the profits of these non-U.S. companies in a tax-free manner.  Angela is active in operating these companies. This can all be accomplished using a non-953(d) PPLI policy.

Key elements in this planning scenario are diversification and investor control regulations. These regulations must be strictly complied with for a 953(d) PPLI policy or all is for naught.  In the example of Mr. LeGrand, we used a non-953(d) PPLI policy, and the insurance company is domiciled in Barbados. The diversification and investor control regulations do not exist in the Barbados tax and insurance code.

Mr. LeGrand can generate profits from his companies on a tax-deferred basis, and continue to operate these companies himself.  He also does not have to diversify his holdings as he would on a 953(d) compliant PPLI policy.

Now back to our news article, and a few key paragraphs from it:

“If the U.S. doesn’t agree by June 2019 to exchange the bank account details of non-U.S. citizens with governments around the world, it will be placed on the European Union’s tax haven blacklist.

The U.S. is on the clock as the 2019 deadline nears for adopting and applying the Organization for Economic Cooperation and Development’s common reporting standard, Valere Moutarlier, the EU’s head of direct taxation, told a new European Parliament tax investigative committee May 15. The Paradise Papers panel was set up in March following a data leak of more than 13 million files detailing the way wealthy individuals and large companies avoid taxes via offshore structures, such as trusts.”

In our example of the LeGrand family, a bank account can be opened by the insurance company, who becomes the beneficial owner of the assets that Mr. LeGrand places inside his PPLI policy. Mr. LeGrand’s assets are held by the bank in separate accounts in his name, therefore, he can access the account for his own purposes.

Back to Angela.  How can she receive funds from the companies tax-free?  Since all assets are inside a properly structured PPLI policy, funds withdrawn from the PPLI have been re-characterized as tax-free loans and not profits subject to taxation.

Angela simple makes these loans for a 25 bps charge, and the loan balance is subtracted from the death benefit when the insured passes. Angela will receive the companies as a tax-free death benefit at the passing of the insured life under the policy.

All questions and comments are greatly appreciated. Please let us know how we can assist you in crafting structures similar to the one used for the  LeGrand family.

 

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

 

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