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Life insurance is an underutilized, but potentially versatile and highly efficient investment vehicle. It is useful not only for wealthy families. Only an individual or family with a net worth of $1 million or less is financially able to finance an offshore, irrevocable life insurance trust (ILIT) that provides a variable high-yield life insurance benefit, asset protection, tax-free provides development. Investment portfolio, tax-free policy loan during the life of the policyholder, tax-free payment of the policy to the trust upon death of the policyholder, and tax-free distribution to beneficiaries.
It is well known that standard whole and universal life insurance policies provide tax-deferred growth of the cash or investment value of the policy. However, the cash value of a standard policy is part of the general investment fund of the insurance company. The increase in cash value within the policy is usually relatively small, typically a few percent annually. Also, the policy is only as secure as the insurance company. Policy funds are usually mixed with the general funds of the insurer, and the policy owner or beneficiary is essentially an unsecured creditor of the life insurance company. In case of insolvency of the insurer, the policy assets may be lost.
Private Placement Life Insurance (PPLI) is a privately arranged life insurance contract between an insurance carrier and a policy owner. PPLI offers several benefits as compared to standard policies. Policy funds are kept in segregated accounts that protect the funds against the carrier’s creditors. PPLI enables a wide range of investment opportunities managed by a professional investment advisor chosen by the policy owner. Finally, the cost of the policy is transparent, negotiable and generally lower than off-the-shelf insurance products. However, one problem with domestic insurance companies offering PPLI in the US is that they usually require a minimum insurance premium commitment of $10 million to $50 million.
Offshore PPLI policies are more favorable than domestic PPLI based in the United States. Offshore insurance companies are not subject to the strict SEC and state insurance regulations in the US, which limit the investment types available for home insurance policies. In addition, offshore PPLI policies are not subject to state premium taxes charged by various states. Although a policy issued by a foreign insurance carrier is subject to a 1% U.S. excise tax, this is balanced by not being subject to the federal deferred acquisition cost (DAC) tax. One of the key advantages of an offshore PPLI is that it is offshore, meaning that the offshore life insurance carrier can be selected so that it is not subject to the jurisdiction of US courts. Offshore PPLI typically has a minimum premium commitment of $1 million or less over five to seven years, and the fees associated with offshore PPLI are typically around 1.5% to 2% of the premium load.
An Offshore Irrevocable Life Insurance Trust (ILIT) optimizes tax-free wealth creation and financial protection of PPLI beneficiaries, as well as providing protection for policy assets and other trust assets against claims from creditors of the beneficiaries. An offshore trust is not subject to the jurisdiction of US courts and other US government agencies. Many offshore countries have adopted legislation specifically designed to protect trusts registered in their jurisdictions against attack by outside courts and governments. An offshore trust jurisdiction usually requires that a trust pay an annual government registration fee and utilize the services of a local trustee. Because the trust business is a significant revenue source and contributes to the local economy, offshore jurisdictions are motivated to protect the integrity of trust beneficiaries’ locally registered asset-protection trusts against outside creditors.
In a hypothetical example, a US taxpayer establishes an irrevocable offshore asset protection trust, for example, in the Cook Islands (South Pacific) or Nevis (Caribbean). Initially or over the next five to seven years, the person irrevocably contributes trust property equal in value to the existing lifetime exemption for wealth tax and generation skipping transfer tax (GSTT), for example, $1 million. The US taxpayer allocates his/her lifetime exemptions to trust contributions, thereby creating a dynasty trust that will be exempt from US estate and GST tax. If the trust assets are not invested in life insurance, US income tax and capital gains tax are paid on the investment growth in the trust. On the other hand, if and when the trust assets are invested in life insurance policies, the investment growth is not taxed.
Further, when the policy proceeds are paid to the trust (as the policy beneficiary) on the death of the life assured, no income tax, no wealth tax and no GST tax is payable. The overall result is that trust beneficiaries benefit from tax-free life-insurance investment growth and tax-free wealth transfers. Tax benefits of life insurance are available with traditional policies, not only through PPLI. One advantage of PPLI is greater investment flexibility, which allows for greater investment growth potential. An additional advantage of a preferred structure including a self-settled, irrevocable life insurance trust is that the settlor (the person establishing and funding the trust) can benefit from the trust during his or her lifetime through tax-free insurance-policy loans. . Trustee. Initial professional fees (legal and accounting services) to set up a preferred structure are typically in the range of $20K to $50K. Annual trust and trustee fees are typically around $5,000.
Full compliance with US tax law is an important feature of a preferred structure that includes an offshore asset protection trust that owns the offshore PPLI. In fact, the preferred structure recommended here is tax neutral, that is, there is no tax gain or loss as a result of being offshore. The formation and administration of an offshore ILIT structure is slightly more complex and costly than a domestic trust. But, unless there are creditor problems, the trust is administered and treated as a US trust for US tax purposes. Although some additional forms must be submitted annually to the IRS, the tax status is the same whether onshore or offshore. Offshore benefits are much safer asset protection, lower insurance costs and greater investment flexibility.
Offshore PPLI’s have greater investment flexibility, especially the ability to invest policy funds in high-growth assets such as hedge funds or start-up companies, compared to traditional life insurance. As a formality, the policy assets are kept in separate accounts owned and managed by the insurance company. Typically, the insurance company hires an asset manager directly or indirectly recommended by the policy owner, often the same manager who manages the settlor’s other non-reliable assets. Some of the same benefits of the preferred structure can be obtained using less preferred structures. For example, a traditional (non-private-establishment) offshore life insurance policy owned by an offshore life insurance trust provides asset protection and favorable tax treatment (i.e., no taxes on income, capital gains and assets), but Policy assets will be placed in the insurer’s general fund and investment returns will be lower.
An Irrevocable Life Insurance Trust (ILIT) and an offshore PPLI policy can be financed using a variety of assets, basically anything that can add value: stocks, bonds, hedge funds, commodities, collectibles , Real estate, business enterprise. Equity stripping of assets located in the United States through loans on real estate and business equipment can be used to generate cash for contributions to an offshore asset-protection life-insurance trust. Wealth tax and GSTT exemption can be availed by contributing assets to a life-insurance trust before the high growth occurs. The exemption of sale of promissory note and closely held assets can also be used to avail wealth tax and GSTT exemptions. A married couple can use the lifetime exemptions of both spouses to fund the trust.
The long-term outlook for the US dollar and the US economy is poor. The US manufacturing base is deteriorating and moving overseas. Services such as software development, technical support, accounting and legal work are moving from the US to low-paying developing countries. The consumption of imported petroleum and cheap manufactured goods causes a continual drain of dollars from the US economy, which are then borrowed back with interest. The US national debt of $13.3 trillion (August 2010) is unmanageable unless it is paid off through inflation.
Federal spending on the military, foreign wars, and domestic entitlement programs is seemingly uncontrollable, and the annual deficit will only be contained through drastic tax increases. Nonpartisan Peter G. The Peterson Foundation reports that as of September 2009 the federal government faces unfunded liabilities totaling $61.9 trillion over the next 75 years that are not covered by expected tax revenue. The Government Accountability Office predicts that interest costs on the growing debt and spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.
Individual state and local jurisdictions are sinking under the weight of flawed and irresponsible compensation and pension plans for civil servants as well as federally mandated social engineering and entitlement programs. Whether through the anticipated Obama tax hike or any other stimulus, sooner or later, the US Congress, state and local governments will substantially increase the effective tax rates for US residents. The US economy probably won’t collapse overnight, although it almost did in September 2008. Still, as a practical matter, making money and keeping it is going to get a lot harder in the years to come. Furthermore, anyone living in the US can be sued by anyone for almost any reason, and the cost of defending a lawsuit can be as much or more than paying to have it go away. Doing. A person or business based in the US owning significant assets, or a person trying to earn a living or run a business, is hostage to these realities.
The antidote, or vaccine, against these threats to financial well-being is a self-settled asset-protection PPLI irrevocable life insurance trust (also known as a dynasty trust or GST trust). The preferred structure provides several important benefits to the settlor and other beneficiaries. It moves substantial assets offshore, where US courts or other government agencies cannot levy them. This allows tax-free growth of a global, variable investment portfolio managed by a trusted financial advisor in full compliance with US tax laws. At the trustee’s discretion, the trustee property (including tax-free insurance policy loans) is available to the settlor during his or her lifetime. On death of the life assured, the policy proceeds are paid tax-free to the trust. Assets grow steadily in a well-managed Dynasty Trust. Thus, the dynastic trust secures the financial well-being of the spouses, children, and their descendants forever. These benefits are especially valuable in a world of punitive taxes, deteriorating job opportunities, declining incomes, mismanaged economies, overpopulation, disintegrated societies, unnecessary wars, and corrupt governments. Through creative legal and financial planning, these benefits are now available to moderately wealthy individuals and families.
WARNING & DISCLAIMER: This is not legal advice.
Copyright 2010 – Thomas Swenson
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