EWP and Financial Architecture

Financial Architecture
The Comprehensive Blueprint

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Would you build a custom home without an architect?

Have you constructed your financial affairs without one?

How would you know?

You have constructed your financial home over time, using the best options available when opportunities presented themselves. This may inadvertently have created a house constructed by multiple architects, many different styles that may or may not fit together.

Why not take the designs that we have used with great success for the world’s wealthiest families to remodel your own house?

As financial architects, we can offer you an overreaching, comprehensive, and cohesive design optimized for privacy, tax efficiency, and asset protection.

We are not here to replace your trusted business or investment advisors. Our role is to take what you have already accomplished and place it into a structure that will create a unified design for all your interests, a method we have used for the world’s wealthiest families, families with a wide variety of assets and financial arrangements.


EWP FinancialAt EWP Financial our design basics are the six principles of EWP: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.
Read our White Paper for all the important details.

EWP Financial
Our firm, EWP Financial, serves wealthy families wherever they might reside.
We offer the most advanced financial planning tools available to assist them in making the six principles of EWP the building blocks of their asset structures.
As our outstanding track record has proven, the asset structures that we build have remained solid for multiple generations, bringing wealthy families financial security and peace of mind.

Company Background
Michael Malloy, CLU TEP RFC is the founding partner of the firm,who began his career over 30 years ago as a risk management consultant. He founded the Life Insurance Law Newsletter, and has written two books towards this end: The PPLI Papers and The Wit and Wisdom of Professor PPLI. EWP Financial was recently formed as the parent company for the several entities that currently serve wealthy families worldwide.

Distinguished Professor of Law
Serving as academic counsel to EWP Financial is Distinguished Professor of Law, Craig Hampton. Professor Hampton is highly regarded as a global authority in mattersinvolving fiscal privacy, financial and estate planning, asset protection, and sophisticated insurance structuring and analysis. An award-winning author, his written works include Survivorship Life Insurance, a best-selling publication by the American Bar Association.

Six Regional Representatives
Our bespoke approach to serving wealthy families worldwide includes our six regional representatives whose unique knowledge-based solutions provide individualized and highly personal service. The regional representatives bring not only in-depth technical knowledge, but as natives of the regions that they serve, they can tailor our structures to the cultural norms of wealthy families throughout the world.
The blueprint for your new, spectacular designer home is revealed in our White Paper, Expanded Worldwide Planning (EWP) At Its Best.

Expanded Worldwide PlanningWhat Is an EWP Asset Structure?
The authority of Expanded Worldwide Planning (EWP) has been firmly established. Wikipedia has recognized our knowledge-based solutions for wealthy families by including the concept of EWP in their article on International Tax Planning. On this Wikipedia page, the six principles of EWP are explained. EWP is defined as:
“An element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.”

The six principles of EWP are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.
We are taking a cue from Wikipedia. Our white paper features the six principles of EWP.
EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

Is It Legal?
It seems every few months that there is another revelation of a tax dodger using offshore accounts to avoid U.S. taxes. Here is a recent newspaper headline:

                      “The IRS Reals in a Whale of an Offshore Tax Cheat—and Goes for Another.”

Is an EWP Structure just another one of these schemes?
Our EWP Structures have existed since the early 1990s with no issues of any kind either from the IRS or the families who have employed these asset structures.

Can They Steal My Money?
The answer is, “No.” Why is this so? Because all your assets are held in separate accounts by a trustee. This is a similar arrangement to having a trust account at a bank. The bank becomes the trustee of the asset, but ownership does not change hands—you retain ownership of all the assets held in an EWP Structure.

Will I Be Audited?
We will use a multi-lane motorway or freeway as our analogy to show how EWP Structures are ideally positioned to serve the needs of wealthy families worldwide.

Where are EWP Structures positioned on this motorway?
The fast lane is for those drivers who are the risk takers, traveling at ever faster speeds until they hear the sound of a patrol car chasing them down. In the slow lane are those drivers who wish to drive the speed limit, or wish to travel at a leisurely pace to reach their destination. In the middle lanes are those drivers who wish to blend into the flow.
Not be the fastest on the road, or the slowest. In the universe of financial planning tools, EWP Structures are traveling in these middle lanes.
These middle lane drivers are avoiding the newest innovations in planning techniques championed by those in the fast lane, and, also, staying away from strategies that accomplish little which are adopted by those in the slow lane. The drivers in the middle lanes will reach their destination safely with little risk of a confrontation with the authorities, who are concentrating on the drivers in the fast lane.
By using EWP Structures, the families driving in the middle lanes accomplish the maximum amount of privacy, asset protection, and tax efficiency, and are fully compliant with tax authorities worldwide.

Testimonials

“Passion, knowledge, transparency and a genuine interest in achieving the best for clients are
what makes a truly professional financial adviser. Michael Malloy has this and more. His
dedication to clients, business excellence and education sets him apart, and I would highly
recommend him to anyone wanting to receive outstanding financial advice.”
                                                                                            – Javier Gavito, Gaia Capital
                                                                                             Director General, Mexico City

“Have been looking for some time for a provider that really has the skill and sophistication
to ensure that family wealth flourishes across several generations. Many say they do, but
don’t. Advanced Financial Solutions, Inc. (AFS) does. AFS combines the expertise pertaining
to family wealth with a deep experience of working directly with wealthy families. I would
recommend them to anyone who wants to properly structure their assets to achieve the
maximum amount of asset protection, privacy, and tax efficiency.”
                                                                                         – Stephen Brent Wells
       – Senior Managing Director at Solaris Advisors, LLC a division of KF Group LP, New York City

“Michael Malloy has a profound knowledge of economic relationships, including their
international ramifications, as well as a keen sense of possible future developments. Together,
these two aspects enable him to have a highly accurate analysis of complex economic
situations. This in turn lets him carefully weigh the opportunities and risks of various
investment strategies.
On the basis of this, I feel I can highly recommend Mr. Michael Malloy’s professional
services. The above is not subject to my liability as per the German Civil Code (see section
675 paragraph 2 of the German Civil Code.). I have given this statement to the best of my
knowledge and belief.”
                                                – Ulrich Herrman
                                                – Presiding Justice of the Federal Supreme Court, Germany

 

by Michael Malloy, CLU TEP RFC.

CEO, Founder @EWP Financial

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

EWP At Its Best-2

EWP at its best 2

International Tax Planning (EWP) At Its Best

White Paper-Part 2

 The authority of Expanded Worldwide Planning (EWP) has been firmly established. Wikipedia has recognized our knowledge-based solutions for wealthy families by including the concept of EWP in their article on International Tax Planning. On this Wikipedia page, the six principles of EWP are explained. EWP is defined as “an element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.”

The six principles of EWP are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.

The Wikipedia article goes on to say, “EWP allows a tax paying entity to simplify its existing structures and minimize reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). These international assets can also comply with tax authorities worldwide.”

We are taking a cue from Wikipedia. Our white paper features the six principles of EWP. EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

Compliance Simplifier

For most people a spider’s web is not a positive image. For this reason EWP uses a spider’s web as a symbol of an overly complicated asset structure with multiple entities and a confusing array of boxes and arrows. In its complexity, what we call a Spider Web Structure might look impressive to some, but the end result is summarized in three words: overcomplication, confusion, and uncertainty.

Our excellent alternative is an EWP Structure, which was born out of the necessity to achieve greater tax efficiency, privacy, and asset protection. The laws and regulations that govern an EWP Structure are made possible through a more stable and straightforward body of law than the more politicized tax laws and regulations worldwide.

Read full article in our Partner Site

Read Part 1

Download White Paper, (full version)

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

 

EWP At Its Best-1

EWP at its best 1

International Tax Planning (EWP) At Its Best

White Paper-Part 1

The authority of Expanded Worldwide Planning (EWP) has been firmly established. Wikipedia has recognized our knowledge-based solutions for wealthy families by including the concept of EWP in their article on International Tax Planning. On this Wikipedia page, the six principles of EWP are explained.

EWP is defined as:

“An element of international taxation created to implement directives from several tax authorities following the 2008 worldwide recession.”

The six principles of EWP are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute.

The Wikipedia article goes on to say,

“EWP allows a tax paying entity to simplify its existing structures and minimize reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). These international assets can also comply with tax authorities worldwide.”

We are taking a cue from Wikipedia. Our white paper features the six principles of EWP. EWP has the six principles that matter most to wealthy families throughout the world today—no matter where they are located. They are the building blocks of any successful asset structure.

Privacy

Privacy is a key element. Wealthy families are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide.

What was once private and personal becomes public and accessible to all. Computers and other electronic devices are part of our lives, whatever our opinion of them. These devices can add convenience and efficiency to our lives, but at a cost.

Electronic Privacy?

Andrew Grove, co-founder and former CEO of Intel Corporation, expressed this thought:

“Privacy is one of the biggest problems in this new electronic age. At the heart of the Internet culture is a force that wants to find out everything about you. And once it has found out everything about you and two hundred million others, that’s a very valuable asset, and people will be tempted to trade and do commerce with that asset. This wasn’t the information that people were thinking of when they called this the information age.”

EWP has the six principles that matter most to wealthy families throughout the world today–no matter where they are located. They are the building blocks of any successful asset structure.

The ancient Greeks called man, “a political animal.” In today’s world almost all so-called facts are politicized. It is no different with privacy. Certain groups consider the journalistic authors of the Panama Papers and the Paradise Papers heroes of a free press. Others say that these same journalists were thieves, who unlawfully stole private financial data. Whatever your opinion, these events did happen, and the targets were most decidedly wealthy families throughout the world.

How does the privacy afforded by an EWP Structure protect the families whose financial information was published for the entire world to see?

The privacy principle of EWP accomplishes its objective in several key ways:

  • Upon transfer into an EWP Structure, the asset is retitled into the name of the beneficial owner of the asset, similar to retitling property in a Limited Liability Company (LLC) structure.
  • If there is reporting to a tax authority for the EWP Structure, only one number is reported. This is the value of all the assets in the EWP Structure. The individual assets are not reported.
  • The bank account that is usually opened in connection with an EWP Structure is opened in the name of the new beneficial owner of the assets and not the policyowner. The policyowner has full access to the funds in the bank account in accordance with the assets inside the policy.

Asset Protection

Our asset protection model is called The EWP Da Vinci Code. Our model is highly effective, yet conservative, and offers more asset protection than the recently invented options available to wealthy families. In today’s world of financial transparency, there is no hiding of financial assets. The EWP Da Vinci Code brings you peace of mind through a long-established and secure financial structure.

Why bring Leonardo da Vince into this discussion? Because Leonardo said,

“Simplicity is ultimate sophistication.”

We have taken this as our model in implementing EWP Structures. We invite you to do the same.

When you purchase an automobile, you do not ask if it has turn signals. Of course, this is a standard part of the vehicle. Today you may pay extra for an enhanced audio package, but you might be able to do without it. Asset protection does not come as an extra feature with EWP Structures, it is part of the package, just like turn signals on a new vehicle.

The EWP Da Vinci Code Realized

Most asset protection trusts established by U.S. settlors are considered grantor trusts under U.S. income tax law, meaning that all income of the trust is reportable on the grantor’s (the settlor’s) individual income tax return. Asset protection trusts do not, in and of themselves, offer any tax advantages under U.S. income tax law.

So why not create a structure that not only gives you asset protection, but the whole formidable array of benefits that EWP provides? For wealthy families, in particular those families with a connection to the U.S., an EWP Structure is arguably the most efficient structure for the integration of tax-free investment growth and asset protection.

Tax Shield

Savvy, wealthy families today are employing EWP Structures in greater and greater numbers. A hallmark of the popularity of this asset structure is its conservative and straightforward nature. This ironically allows it to achieve spectacular tax savings.

Why strain to invent a structure that will very likely draw the attention of tax authorities, because of its convoluted and aggressive design? We counsel you to stop trying to be overly clever in the design of your asset structures. Why not use a financial structure that has been used successfully to structure hundreds of billions of dollars in assets for wealthy families throughout the world. This will give you the best tax shield available today bar none.

Who Pays the Most Tax Today in the U.S.?

The most recent IRS data, from 2016, shows that the top 10 percent of income earners pay almost 70 percent of federal income taxes.

Looking at all federal taxes, the Congressional Budget Office shows that the top 1 percent pay an average federal tax rate of 33.3 percent. The data show tax rates decline with income, and the poorest 20 percent of the population pays an average tax rate of just 1.7 percent.

EWP Structure Benefits with Real Estate Investing

The benefits of using an EWP Structure for U.S. persons investing in real estate in the U.S. are substantial. For the Non-U.S. person it is even more important to employ an EWP Structure, as there are formidable obstacles faced by non-U.S. persons investing 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 (30%), and even U.S. estate taxes. An EWP Structure is a well-established tax and estate planning tool that many qualified investors utilize to mitigate and manage these exposures.

Succession Planning

Many countries, primarily in civil-law jurisdictions, require forced distribution of assets at death according to strict laws and regulations. This usually takes the form of percentage shares of assets that will be distributed to spouses, children, and other close relations of the deceased. An EWP Structure executed outside the home country of the owner or policyholder is a method to mitigate these forced heirship rules.

Since an EWP Structure is executed outside the home country of the policy owner, the forced heirship laws do not apply, as the policy will be governed by the laws where the insurance company is domiciled.

This element of EWP provides a wealth holder an excellent method to enact an estate plan that conforms to his/her own wishes, and not be dictated by the forced heirship rules of his/her home country. To be successful this needs to be well-coordinated with all the aspects of an EWP Structure, as well as all the other elements of a wealth owner’s financial and legal planning.

International families can eliminate the vagaries of court decisions which hinge on details of the law like inter vivos transfers versus testamentary transfers by using an EWP Structure. This will secure their own estate planning wishes using a legally binding contract with no need of court decisions in any jurisdiction.

The laws governing these contracts are written specifically to accommodate international wealthy families. These laws enhance not only succession planning, but provide excellent asset protection, privacy, and tax efficiency.

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

 

EWP & Trust Substitute-Part 2

International Tax Planning & Trust Substitute—Part 2

EWP (Expanded Worldwide Planning) and Trust Substitute

Private Placement Life Insurance (PPLI) in Action

A Stradivarius Violin Plays the EWP Super Trust

 

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In Part 1 we spoke about how a beginner’s violin knows nothing of the deep, rich, and more pleasing tone of the Stradivarius violin. We equated the Stradivarius violin with the more sophisticated uses of asset structures that employ PPLI to its full effect. In Part 2 we will learn about the EWP Super Trust, which indeed uses the deep, rich, and more pleasing tone of the Stradivarius violin.

Ironically, the most simple PPLI structure, a Frozen Cash Value (FCV) policy, offers wealthy families the most advanced structuring possibilities available in the world today. A family can place almost any asset class that is located almost anywhere in the world into a FCV policy, and still have it compliant with tax authorities worldwide.

The FCV PPLI structure almost eliminates the concept of cash value in the traditional sense. The growth element of the assets in the policy is paid out as a tax-free death benefit at the death of the insured person(s) in the contract. The amount of the death benefit to qualify as life insurance is just a percent or two of the total assets contributed to the policy, as there must be a risk shifting element to qualify as life insurance under the laws of the jurisdictions who issue the policies.

The maximum the owner of the policy can withdraw is the total value of the premium contributed to the policy. This includes in-kind premiums. The structures that we create for the world’s wealthiest families have sizable premium contributions, frequently in the hundreds of millions and multiple billions. Therefore, if withdrawals from the policy are wished, there is plenty to withdraw. More frequently there are no withdrawals, as these families can accomplish what they wish inside the existing FCV PPLI structure.

In essence, the policy is composed of a small amount of life insurance and the worldwide holdings of a family, offering them the maximum amount of privacy, asset protection, and tax efficiency that is possible. With its own three elements of owner, insured, and beneficiary, it goes far beyond the three elements of a trust: settlor or trustor, trustee, and beneficiary. How is this possible? How can it be fully compliant with the U.S. tax code for those families that have a connection to the U.S.?

The EWP Super Trust

FCV PPLI relies on §7702. Section 7702(a), in defining life insurance, states in part, “the term ‘life insurance contract’ means any contract which is a life insurance contract under the applicable law.”

The meaning of “the applicable law” in both §7702(a) and §7702(g) mean that life insurance policies issued under the laws of other countries are indeed life insurance contracts, even if they do not meet the various cash value tests mentioned in the §7702(a).

The insurance laws of these countries allow the death benefit of the insurance contract to be less than its cash value. In fact, within these countries, a life insurance contract is fully compliant with a cash value well in excess of the death benefit of the insurance policy.

The insurance companies that issue FCV PPLI policies design the policies to conform to the laws of the countries where these insurance companies are domiciled. You then have an insurance policy that is fully compliant under “the applicable law” of these countries. Most nations in the world, including the U.S., allow their citizens to purchase life insurance policies that are issued from countries outside their own.

Thus, the FCV PPLI is fully sanctioned for U.S. buyers, and buyers from other nations in the world who wish to avail themselves of this truly remarkable structuring tool: a Trust Substitute that we call an EWP Super Trust.

FCV PPLI asset structures have been in use by U.S. persons and non-U.S. persons for over 25 years without a challenge by the IRS. Our mission at Expanded Worldwide Planning is to make the most advanced asset structuring techniques available to wealthy families throughout the world.

Why not take advantage of this exceptional opportunity which is supported by 100s of billions of dollars of successful structures that have been put in place over these 25 years?

We offer you another chart which shows what a properly structured PPLI policy can accomplish for non-U.S. persons who own real estate in the U.S. compared with structures that just use trust and other entities.

PPLI with IDF vs. Other Real Estate Structures

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A Safe Drive to the Ultimate Destination

We will use a multi-lane motorway or freeway as our analogy on how life insurance is ideally positioned to serve the needs of wealthy families worldwide. Life insurance is recognized throughout the world as a useful financial planning tool to address the retirement, financial planning, and estate tax needs of families. Where is life insurance positioned on this motorway?

The fast lane is for those drivers who are the risk takers, traveling at ever faster speeds until they hear the sound of a patrol car chasing them down. In the slow lane are those drivers who wish to drive the speed limit, or wish to travel at a leisurely pace to reach their destination. In the middle lanes are those drivers who wish to blend into the flow. Not be the fastest on the road, or the slowest. In the universe of financial planning tools, life insurance structures are traveling in these middle lanes.

These middle lane drivers are avoiding the newest innovations in planning techniques championed by those in the fast lane, and, also, staying away from strategies that accomplish little which are adopted by those in the slow lane. The drivers in the middle lanes will reach their destination safely with little risk of a confrontation with the authorities, who are concentrating on the drivers in the fast lane.

By using life insurance as its basic framework, the families driving in the middle lanes accomplish the maximum amount of privacy, asset protection, and tax efficiency. A PPLI life insurance based structure is indeed the best building block available to achieve the six principles of EWP, and be fully compliant with tax authorities worldwide.

Tax Avoidance vs. Tax Evasion

This brings us to the topic of the regulation of financial planning structures. One key distinction is the difference between what is termed tax avoidance and tax evasion. For some regulatory bodies there is little or no distinction between these two concepts. With our EWP approach to asset structuring, we see a large distinction between tax avoidance and tax evasion. On what grounds do we take this position?

Admittedly, our position is self-serving because our clients’ are the world’s wealthiest families. At the same time we challenge those who take the high moral ground of calling tax avoidance and tax evasion the same thing. Our view can be summarized in IRC v. Duke of Westminster, Baron Thomas Tomlin wrote:

“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Yes, there is some line between tax avoidance and tax evasion, but it is not as simple as saying that putting money in a tax-deferred retirement savings account is morally fine because these accounts are intended by the government. But it is immoral to employ tax avoidance such as—assigning low value to intangibles sold to corporate subsidiaries in order to assign profits to low-tax jurisdictions—because this behavior was not intended by legislators.

Defining the line between tax avoidance and tax evasion involves drawing a line that governments themselves have failed to draw adequately, and places blame squarely on the taxpayer for their behavior. This is all based on a rudimentary idea about what the politicians who wrote the law “intended.”

Conclusion

An EWP Super Trust is a unique vehicle for creating the maximum amount of privacy, asset protection, and tax efficiency for the world’s wealthiest families. We await the opportunity to create one for you!

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

 

 

EWP & Trust Substitute

International Tax Planning & Trust Substitute—Part 1

EWP (Expanded Worldwide Planning) and Trust Substitute

Private Placement Life Insurance (PPLI) in Action

The Dangers of Over Reliance on Trusts

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The more sophisticated tools gravitate toward the most sophisticated users of these tools. A Stradivarius violin is used by a master violinist and not a beginner. When clients and advisors initially approach us about Private Placement Life Insurance (PPLI), they are confused about its uses.

For the most part, what these clients and advisors have read about are beginning uses of PPLI. They have not explored the upper reaches and more sophisticated uses of asset structures that employ PPLI to its full effect. To keep to our analogy, they have picked up a beginner’s violin, and know nothing of the deep, rich, and more pleasing tone of the Stradivarius violin.

We will now discuss the sixth principle of Expanded Worldwide Planning (EWP), Trust Substitute. We will of course speak of the obvious use of a PPLI asset structure in place of a trust structure in some civil law jurisdictions, but we will also expand our discussion to explore the very nature of trust and how they differ from the sophisticated structures that we use for the world’s wealthiest families. Our discussion will also touch on why a PPLI structure is a far better tool for the client who seeks both maximum privacy, asset protection, and tax efficiency, as well as full compliance with the world’s tax authorities.

Advisors Don’t Know What They Don’t Know

The confusion about the uses of PPLI structures that we mentioned in our opening paragraph is exacerbated by the system that educates attorneys, accountants, trust officers, and asset managers. There is virtually no mention of PPLI Structures in colleges, universities, law schools, and the other training grounds of these professionals.

For instance, attorneys spend time learning the various uses of trusts, so they produce these for their clients, even when they are not the best tool for the job at hand. They don’t know what they don’t know.

If we are going to use a PPLI structure as a substitute for a trust structure, or in combination with a trust. Let us ask ourselves the basic question: what is a trust and how did it come to be in existence in the first place.

Let us look at a chart that compares Trusts vs. Life Insurance for creating asset structures for wealthy clients.

Insurance and Trust Comparison

Insurance Trust

◆ Contractually based and used by millions

◆ Tax deferral

◆ Insurance Company is beneficial owner

◆ Simplified or limited reporting

◆ Tax-free asset transfer

◆ No capital gains taxes

◆ Asset protection

◆ Provides some asset protection

◆ Sometimes seen as tool for the rich

◆ More stringent reporting requirements

◆ Tax filings for trust and possibly beneficiaries required by some jurisdictions

◆ No tax deferral

What Is a Trust and Where Did It Come From?

In its most basic form, it is a three-party relationship in which someone, the trustor or settlor, transfers assets to a trustee, for the benefit of a beneficiary.

A trust establishes the distinction between a legal and a beneficial owner. The legal owner was referred to as a “trustee” (because he was “entrusted” with property) and the beneficial owner was the “beneficiary”.

Roman law had a well-developed concept of the trust (fideicommissum) created by wills. However, these testamentary trusts did not develop into the inter vivos (living) trusts which apply while the creator lives. This was created by later common law jurisdictions. The waqf is a similar institution in Islamic law, restricted to charitable trusts.

In England during the time of the Crusades in the 12th century, the law of trusts was constructed as part of “equity”, a body of principles made by the Courts of Chancery, which sought to correct the strictness of the common law. The trust was an addition to the law of property, in the situation where one person held legal title to property, but the courts decided it was fair, just or “equitable” that this person be compelled to use it for the benefit of another.

When a landowner left England to fight in the Crusades, he conveyed ownership of his lands in his absence to manage the estate and pay and receive feudal dues, on the understanding that the ownership would be conveyed back on his return. However, Crusaders often encountered refusal to hand over the property upon their return. Unfortunately for the Crusader, English common law did not recognize his claim. As far as the King’s courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim.

The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could decide a case according to his conscience. At this time, the principle of equity was born. The Lord Chancellor would consider it “unconscionable” that the legal owner could go back on his word and deny the claims of the Crusader (the “true” owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor’s court (the Court of Chancery).

PPLI Structure vs. Trust Structure

Just as a Trust Structure has three elements: trustor or settlor, trustee, and beneficiary, a PPLI, and, indeed, every life insurance policy has three elements: owner, insured, and beneficiary. Using this three party relationship successfully makes many of the advanced structuring possibilities of EWP possible.

As we discussed in our chapter on Succession Planning, some civil law jurisdictions do not recognize trust in the same light as in most common law jurisdictions. In some asset structuring situations, a PPLI asset structure can be a viable substitute for a trust. Upon death of the insured person(s), the value of the assets in a PPLI policy plus any death benefit is paid directly to the beneficiaries listed in the policy. This can facilitate the transfer of wealth and eliminate the need for a trust.

Conclusion

Trusts serve an essential purpose in planning for the world’s wealthiest families, but over reliance on them is a grave mistake. If done correctly, the marriage of a trust with a properly structured PPLI policy can indeed be a happy one. Please contact us today to find out how you can benefit from this happy marriage, which has served the most sophisticated clients worldwide for over 25 years.

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

EWP & Compliance Simplifier-Part 2

International Tax Planning & Compliance Simplifier—Part 2

EWP (Expanded Worldwide Planning) and Compliance Simplifier

Private Placement Life Insurance (PPLI) in Action

Inside a Deadly Spider Web Structure

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Depending on the planning needs of international families, two types of trusts are generally used, Foreign Grantor Trust and Foreign Non-Grantor Trust. These trusts can accomplish some of the aims of the six principles of EWP, but they can do nothing in terms of tax efficiency. For this a trust must own a properly structured PPLI policy. An EWP structure uses the six principles of EWP to give families the optimum amount of tax efficiency, privacy, and asset protection.

Foreign Grantor Trusts

A foreign trust is considered a grantor trust for U.S. income tax purposes when a U.S. grantor makes a gratuitous transfer to a foreign trust that has one or more U.S. beneficiaries or potential beneficiaries of any portion of the trust. The trustee of a foreign grantor trust with a U.S. owner is required to file Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner, with the IRS each year. Such form includes an accounting of the trust’s activities for the year.

The Form 3520-A is due on March 15th and a six-month extension may be requested.

The trustee should also provide a “Foreign Grantor Trust Owner Statement” to each U.S. owner of a portion of the trust and a “Foreign Grantor Trust Beneficiary Statement” to each U.S. beneficiary who received a distribution during the taxable year.

The U.S. owner of the foreign grantor trust is subject to U.S. income tax on the portion of the trust income he or she is considered to own. In addition to the Form 3520-A, the owner must file a Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, to report any transfers to the foreign trust. Form 3520 must also be filed each year to report ownership of the foreign trust even if no transfer is made. Form 3520 is required to be filed by the due date of the individual’s Form 1040 including extensions.

U.S. beneficiaries of a foreign grantor trust who receive any distribution during the taxable year must also file Form 3520 to disclose the amount and source of the distribution. In addition, the Form 3520 discloses the amount of taxable income that is includible on his or her income tax return. The U.S. beneficiary is also required to disclose the fact that a distribution was received on Form 1040, Schedule B, Part III.

Foreign Non-Grantor Trusts

Foreign non-grantor trusts generally are not subject to U.S. income tax unless the trust earns U.S. source or effectively connected income. Such income is taxed at graduated rates applicable to domestic trusts. Depending upon the investments that the trust holds as well as treaty considerations, the Trusts may be subject to non-resident withholding. Foreign information disclosures may be required as well.

The trustee should provide a Foreign Non-Grantor Trust Beneficiary Statement to a U.S. recipient that received a distribution which reports the amount of the distribution as well as a breakdown of the character of the income. The U.S. beneficiary is required to report the distribution received on Form 3520. In addition, the U.S. beneficiary must pay income tax on the current year trust income included in the distribution and may also be subject to an additional tax (“throwback tax”) to the extent the distribution includes undistributed income from a prior year, termed undistributed net income (UNI). Further, in order to deter trusts that do not distribute income currently, an interest charge may be imposed.

Don’t Trust in Trusts Alone

The strands that form a spider’s web are sticky, and cling to you when touched. Likewise, a Spider Web Structure clings to tax authorities in very unwelcomed ways and binds you and your family to them through the overcomplication, confusion, and uncertainty of the asset structure.

We have chosen a Spider Web Structure that involves non-U.S. persons, who are neither U.S. citizens nor residents of the U.S.(NCNR). These families have both U.S. beneficiaries and non-U.S. beneficiaries, and have created two Foreign Corporations (FC). The Spider Web Structure begins simply enough, but as you will read, the ending is not so simple.

The trustees of the Foreign Grantor Trust (FGT) then created a second Foreign Corporation, which would own only non-U.S.-situs assets. The original FC would own only U.S. securities. The non-U.S. portfolio assets owned by the second FC would be earmarked to benefit solely non-U.S. persons as trust beneficiaries after the death of the NCNR. The U.S. portfolio assets owned by the existing FC would be earmarked for the U.S. beneficiaries.

There would be no U.S. estate tax on the non-US assets owned by the second FC. A retroactive check-the-box election could be filed for this second FC effective on the day before the NCNR’s death.

Some US advisors advocate relying exclusively on entity structuring to convert a single FC into a multi-tier FC structure involving at least three FCs. Prior to the NCNR’s death, the trustees of the NCNR’s FGT would create two FCs. These two FCs would then together equally own the shares of a third lower-tier FC.

The US portfolio assets would be owned by the lower-tier FC. Following the death of the NCNR, the lower- and upper-tier FCs would be deemed liquidated for US tax purposes (by filing check-the-box elections) in a carefully scripted sequence as follows.

  1. First, the upper-tier FCs would each file a check-the-box election for the lower-tier FC, effective one day prior to the death of the NCNR. This results in a taxable liquidation of the lower-tier FC without current US income tax on the historical pre-liquidation unrealised appreciation inside the FC. However, the upper-tier FCs’ basis in the underlying US securities held by the former lower-tier FC will equal the FMV of such assets on the date of the deemed liquidation of the lower-tier FC.
  2. Second, two days after the NCNR’s death, both upper-tier FCs will make simultaneous check-the-box elections. The inside basis of the US portfolio assets previously held by the lower-tier FC prior to its deemed taxable liquidation would be stepped up or down to the FMV of such assets on the day after the death of the NCNR.

Now you understand why we call it a Spider Web Structure? In reading through this structure, do you get an eerie feeling that something might go wrong if something unexpected happens in the web? Perhaps these check-the-box elections might not be done in precisely this manner? Do you think we have an alternative? You are right!

PPLI: An Elegant Solution

An EWP structure is easily produced if the FNGT purchases a PPLI policy none of the above convoluted planning of the Spider Web Structure need occur. The PPLI structure satisfies the needs of both the U.S. beneficiaries and the non-U.S. beneficiaries, as assets in the policy can be located in any jurisdiction worldwide, and distributions can be made to both sets of beneficiaries in a properly structured policy without any taxation.

Once investments are part of a properly constructed PPLI policy none of the following are treated as taxable income:

  • The income and investment returns inside the policy;
  • Withdrawals up to premium;
  • Policy loans, and;
  • Death benefit proceeds.

Pre-immigration Planning

The strategy of funding a FNGT with PPLI is even more successful when applied prospectively, prior to the accumulation of any UNI in the trust, for example before a non-U.S. person establishes U.S. residency. By funding the FNGT with PPLI when the trust is first established, U.S. beneficiaries can remove UNI complications altogether. All the assets that are placed in this PPLI policy are effectively placed outside the U.S. tax system, and can be passed onto beneficiaries tax-free. Timing is crucial for this PPLI structure to be the most effective, as it needs to be established before the U.S. person has entered the U.S. tax system.

At the Heart of EWP Is PPLI

Why engage in complex trust and entity planning that just produces overcomplication, confusion, and uncertainty–yes, Spider Web Structures? You can definitely accomplish much more with a more simple and straightforward EWP Structure that uses PPLI as its core element. We invite you to inquire today to find out how we have helped families worldwide achieve privacy, tax efficiency, asset protection, and, of course, compliance simplification.

 

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

Michael Malloy-CLU-TEP

 

 

 

 

 

 

 

 

 

EWP & Compliance Simplifier

International Tax Planning & Compliance Simplifier—Part 1

EWP (Expanded Worldwide Planning) and Compliance Simplifier

PPLI Keeps You Out of a Spider Web Structure

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For most people a spider’s web is not a positive image. For this reason Expanded Worldwide Planning (EWP) uses a spider’s web as a symbol of an overly complicated asset structure with multiple entities and a confusing array of boxes and arrows. In its complexity, what we call a Spider Web Structure might look impressive to some, but the end result is summarized in three words: overcomplication, confusion, and uncertainty. Later on we will give you a detailed description of a Spider Web Structure.

We propose an alternative asset structure that we call an EWP Structure.

At the heart of an EWP Structure is a Private Placement Life Insurance (PPLI) policy which was born out of the necessity to achieve greater tax efficiency, privacy, and asset protection in one low cost structure with institutional pricing. A PPLI structure is made possible through the laws and regulations of life insurance. A much more stable and straightforward body of law than the more politicized tax laws and regulations worldwide.

FATCA and CRS

The beginning of the end for Spider Web Structures began in 2010 with the birth of the Foreign Account Tax Compliance Act (FATCA). The impetus was to stem the tide of U.S. persons using overseas accounts and assets for the purposes of tax evasion. The structure of FATCA is twofold. First, individual taxpayers must report their qualifying foreign income to the Internal Revenue Service (IRS). At the same time, the Foreign Financial Institutions (FFIs) that hold or process that income must report the identity of their qualifying U.S. clients to the United States.

Nine years later, the Organization for Economic Co-Operation and Development (OECD), at the behest of the G20 and the G8, proposed similar regulations under the name CRS, or Common Standard on Reporting and Due Diligence for Financial Account Information. In fact, some commentators, noting the similarities between the two initiatives, have dubbed CRS GATCA, or Global FATCA. Though both FATCA and CRS try to combat tax evasion, there are some notable differences between the two sets of regulations.

One of the biggest differences between FATCA and CRS is the breadth of its design. Whereas FATCA requires financial institutions to report only those customers who qualify as U.S. persons, CRS involves more than 90 countries. Under CRS, virtually all foreign investments handled by a financial institution become subject to a CRS report.

One of the ways the IRS encourages compliance with its FATCA regulations is by imposing sizable penalties over those companies who fail to report their U.S. taxpayers’ list. Companies who register with the IRS agree to withhold 30% on certain U.S. payments to foreign payees if those payees do not provide verification of their taxpayer status. This puts the onus of the work of client identification and verification on the Reporting Financial Institution (RFI), not the IRS.

By contrast, the CRS does not charge a withholding tax to any of the RFIs working under its provisions.

Another strong impetus that favors EWP Structures are unexpected disclosures by the press that aim to discredit worldwide financial centers, and the asset structures that are formed in them. The unauthorized publishing of documents in the Panama Papers and Paradise Papers caused financial documents to be made public that were thought to be private.

Some good came out of these disclosures in that those who sought to illegally hide assets from tax authorities were exposed, but at the cost of discomforting many innocent families who had their financial affairs paraded across the popular press.

These families sought to do no more than Judge Learned Hand adjudicated in 1934:

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

EWP Structures use life insurance as the main component of their structure. Since a properly structured PPLI policy always has a risk shifting element, it definitely qualifies as a life insurance policy. Life insurance is widely recognized in almost every country worldwide as a conservative and legitimate financial planning tool, and for the most part, escapes these periodic, unwarranted intrusions into the privacy of ordinary citizens.

Complexities of Trust Reporting

When overseas holdings involve foreign trusts, things become significantly more complex. As a trustee, grantor, or beneficiary of a foreign trust, you do not want to make a mistake that could cause significant unplanned negative tax ramifications. The way in which you must report foreign trusts to the IRS varies, depending on the type of trust that’s involved.

Multiple categories of trusts are available, and these categories play a role in how the IRS treats foreign trust from a tax perspective. The tax effects also depend on whether the taxpayer established the trust, serves as a trustee, or will be a beneficiary of the trust.

Based on the taxpayer’s relationship to the foreign trust, the tax laws and forms that could be required include: Form 8966 (which is the FATCA Report), Form 3520, Form 5471, Form 8621, Form 8398, and FinCEN Form 114 (the FBAR).

For a PPLI policy that is owned by a foreign trust there would be reporting for the owner of the trust, but at the policy level only FinCen Form 114 and Form 8938 are currently required, and, only the total value of the assets in the PPLI policy are reported, not the individual assets themselves.

At the Heart of EWP Is PPLI

Why engage in complex trust and entity planning that just produces overcomplication, confusion, and uncertainty–yes, Spider Web Structures? You can definitely accomplish much more with a more simple and straightforward EWP Structure that uses PPLI as its core element. We invite you to inquire today to find out how we have helped families worldwide achieve privacy, tax efficiency, asset protection, and, of course, compliance simplification. Contact Us for any questions you may have.

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

Michael Malloy-CLU-TEP

 

 

 

#michaelmalloy #PPLI #EWP #privateplacement #lifeinsurance #advancedfinancialsolutions

 

 

 

 

EWP & Succession Planning

International Tax Planning, (EWP), and Succession Planning- Part 1

Private Placement Life Insurance (PPLI) in Action

PPLI Benefits International Family Wealth Transfer–Part 1

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Background

Many countries, primarily in civil-law jurisdictions, require forced distribution of assets at death according to strict laws and regulations. This usually takes the form of percentage shares of assets that will be distributed to spouses, children, and other close relations of the deceased. A PPLI policy purchased outside the home country of the owner or policyholder is a method to mitigate these forced heirship rules.

The PPLI policy is a contract between the owner of the policy and the insurance company to pay the beneficiary of the policy the death benefit upon the death of the insured under the contract. A typical beneficiary provision of a life insurance policy states:

              “Unless an alternate payment plan, acceptable to us, is chosen, the proceeds payable at the insured’s death will be paid in a lump sum to the primary Beneficiary. If the primary Beneficiary dies before the insured, the proceeds will be paid to the contingent Beneficiary. If no Beneficiary survives the insured, the proceeds will be paid to your estate.”

Since a typical PPLI policy is executed outside the home country of the policy owner, the forced heirship laws do not apply, as the policy will be governed by the laws where the insurance company is domiciled.

This element of Expanded Worldwide Planning (EWP) provides a wealth holder an excellent method to enact an estate plan that conforms to his/her own wishes, and not be dictated by the forced heirship rules of his/her home country. To be successful this needs to be well-coordinated with all the aspects of a properly structured PPLI policy, as well as all the other elements of a wealth owner’s financial and legal planning.

Here is a list of countries where forced heirship laws exist today in a variety of forms:

  • France
  • Switzerland
  • Germany
  • Turkey
  • Mexico
  • Brazil
  • Argentina
  • Italy
  • Spain
  • Russia
  • Japan
  • Saudi Arabia
  • Yemen
  • Jordan
  • Iran

A Brief History of Forced Heirship

The notion of forced heirship originated with Germanic tribe tradition, which sought to protect the family’s legacy and tradition. The deceased’s personal property was divided into thirds–the widow’s part, the children’s part, and a third part, which consisted of clothes, weapons, and farm animals.

Forced heirship is mostly prevalent amongst civil law jurisdictions and in Muslim countries, but also occurs in other major countries such as the U.S.A. (in Louisiana) and Japan.

There is a substantial difference between civil law jurisdictions and common law jurisdictions. Civil law is rooted in Roman law, and has the functions of the legal system codified and compiled into a collection readily available for citizens to reference. This legal structure requires the judge to rely on the black letter meaning of the law and disregards individual interpretation.

Common law, however, has its rules and regulations administered by judges. This type of individual judicial administration and decision-making allows enforcement of the law to vary on a case-by-case basis rather than on the black letter meaning of the law. The tradition of forced heirship has historically provided a means for heirs to be guaranteed a share in a decedent’s estate

Civil law jurisdiction laws are heavily based on the German Code (BGB) and the Napoleonic Code. Today, the civil law legal system has become the most widespread of all the legal systems globally. Continental Europe, as well as many former European colonies, has adopted and evolved their laws to abide by the civil law structure. This has led to a continued reliance on the notion of forced heirship

Civil Law vs. Common Law Examples of Conflict

United States and Spain

In general the domiciliary jurisdiction at the time of a testator’s death controls movable property. But in this case (Wyatt v. Fulrath, 211 N.E.2d 637,N.Y. 1965) the New York court ruled that the expressed agreement by the couple that New York law was to apply to these assets that were moved to New York. The ruling was sufficient to allow New York jurisdiction and law to override Spanish law.

The law of Spain would have prevented either spouse from agreeing that community property goes entirely to the survivor on the death of either, which was their expressed agreement in New York. Under Spanish law, the surviving spouse would only receive half of the community property deposited in the joint New York bank accounts.

United States and France

In a 2009 New York case (Re Meyer 876 NYS 2d 7, App Div 1st Dept 2009) the court made a distinction between a lifetime, inter vivos, transfer and a transfer at death by will or trust. At issue were gifts of property made during lifetime by a person who was allegedly a French domiciliary at the time she made the gifts.

The court ruled that the gifts were not subject to forced heirship claims because:

                          “The validity and effect of these transfers, as well as the capacity to affect them, are governed by the law of the state where the property was situated at the time of the transfer.”

The Court went on to say that: “[w]e perceiver no valid policy distinction that would allow a nonresident testator to avoid French heirship claims by involving New York law with respect to assets physically situated in New York…but not with regard to previous inter vivos transfers of assets physically situated [in New York].”

Conclusion

International families can eliminate the vagaries of court decisions which hinge on details of the law like inter vivos transfers versus testamentary transfers by using a properly structured PPLI policy. This policy will secure their own estate planning wishes using a legally binding contract between the wealth owner and an insurance company with no need of court decisions in any jurisdiction.

The laws governing these PPLI contracts are written specifically to accommodate international wealthy families. These laws enhance not only succession planning, but provide excellent asset protection, privacy, and tax efficiency.

In our next article, Part 2, we will explore more cross border conflicts involving succession planning, and how PPLI can either mitigate or totally eliminate these conflicts. Your questions and comments are greatly appreciated.

Contact Us today!

 

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

Michael Malloy-CLU-TEP

 

 

 

#michaelmalloy #PPLI #EWP #privateplacement #lifeinsurance #advancedfinancialsolutions

 

 

 

 

 

 

EWP & Tax Shield-Part 3

Expanded Worldwide Planning-EWP and Tax Shield

Private Placement Life Insurance (PPLI) in Action

PPLI Benefits U.S. Persons with Real Estate–Part 3

 

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The universality of Expanded Worldwide Planning (EWP) is not to be denied. This is objectified by Wikipedia. In the first sentence of their page on International Tax Planning, Expanded Worldwide Planning (EWP) is featured.

We are taking a cue from Wikipedia. Over the next few weeks, we will feature one of the six principles of Expanded Worldwide Planning (EWP). The six principles are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute. Today we feature the tax shield.

PPLI Benefits U.S. Persons with Real Estate

The benefits of using PPLI for U.S. persons investing in real estate in the U.S. are substantial. Why don’t more U.S. persons take advantage of these benefits? At Advanced Financial Solutions, Inc., we maintain that it is because of profound misunderstandings about the Investor Control Doctrine and the diversification requirements of variable contracts under IRS code section 817(h).

Ironically, these misunderstandings have been clarified by the Webber decision, Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015). In the popular press, and in many tax journals, this same Webber decision was interpreted as the ‘nail to the coffin’ for PPLI.

Let us explore how the Webber decision makes it clear that in a properly structured PPLI policy, U.S. real estate can be held and still be fully compliant with the IRS. We will do this through the lens of what the Webber decision tells us about the Investor Control Doctrine and the diversification requirements of variable contracts under 817(h).

These are the key points of the Webber decision that support the inclusion of U.S. real estate in a properly designed PPLI policy:

The egregious flaunting of what is known as the Investor Control Doctrine by Jeffrey T. Webber, William Lipkind, his attorney, and the manager of his Insurance Dedicated Fund (IDF) (Butterfield Bank) has blinded advisors and their clients to an essential point in the tax court’s decision. Judge Lauber, the presiding judge, found no objection to the private companies and other investments that were placed as in-kind premium in the two PPLI policies that were in question. There is nothing in the rules regarding PPLI either before or after Webber which would prohibit the use of private company securities, actively operated and closely business interests, and real estate enterprises within a policy IDF or Separately Managed Account (SMA).

The Tax Court’s key issue was the fact that Mr. Webber was on the board of every company in which the policy invested, invested his own funds from his personal wealth and his IRAs, and that he negotiated the terms of every loan on behalf of the company and then gave the instruction to Mr. Lipkind and Butterfield Bank. The court states, “The record includes more than 70,000 emails to or from Mr. Lipkind, Ms. Chang (Webber’s accountant), the IDF Investment Manager, and/or Lighthouse (the insurance company) concerning petitioner’s “recommendations” for investments by the separate accounts. Mr. Lipkind also appears to have given instructions regularly by telephone.”

IRC Sec 817(h) provides a detailed overview of the investment diversification requirements of variable insurance products. The regulations address a wide range of investment alternatives that are not found in retail variable life and annuity products such as direct investment in real estate, and commodities.

Treasury regulations 1.817.5 provide very detailed guidance on the investment diversification rules. The regulations interpret these rules for investment asset classes such as real estate, and allow for a period of time to meet the diversification requirements of IRC Sec 817(h). For non-real estate accounts, the regulations provide for a one-year period to meet the diversification requirements. Real estate accounts provide for a five-year start up period and a two-year liquidation period.

The court states: “The “investor control” doctrine posits that, if the policyholder’s incidents of ownership over those assets become sufficiently capacious and comprehensive, he rather than the insurance company will be deemed to be the true “owner” of those assets for Federal income tax purposes. In that event, a major benefit of the insurance/annuity structure–the deferral or elimination of tax on the “inside buildup”–will be lost, and the investor will be taxed currently on investment income as it is realized.”

It is clear from reading the Webber decision that, if Mr. Webber had followed the very language stated in his policy, his PPLI structure would have worked, and complied with the Investor Control Doctrine and the diversification requirements of 817(h). The court record reads: “As drafted, the Policies state that no one but the Investment Manager may direct investments and deny the policyholder any “right to require Lighthouse to acquire a particular investment” for a separate account. Under the Policies, the policyholder was allowed to transmit “general investment objectives and guidelines” to the Investment Manager, who was supposed to build a portfolio within those parameters.”

PFIC + Subpart F + GILTI = All Redefined with PPLI

Distributions from a properly structured PPLI policy are distributions from a life insurance policy. Like all policies, both U.S. and issued in other jurisdictions around the world, the distributions are subject to the tax code sections that apply to life insurance.

In a properly structured policy, one can withdraw all basis in the policy, which are the premiums paid, tax free, and take very low cost loans to withdraw the remaining funds. The costs of these loans is equivalent to an administrative charge, and is usually in the range of 25 bps. When the policy is held until the death of the insured life, the amount of the loan is merely subtracted from the death benefit, therefore, the loan need not be repaid.

The 2017 Tax Cuts and Jobs Act (TCJA), has brought an increase in taxation for those who have subpart F income. Just like Passive Foreign Investment Company (PFIC) income, subpart F income can be structured inside a PPLI policy, and, therefore, shielded from tax. PPLI has been used for many years to shield PFIC income.

TCJA gave us a new section of the tax code, Section 951A. For those who have an interest in a controlled foreign (CFC), particularly if they are not C corporation shareholders, there is a new opportunity to use a PPLI structure to shield this income from tax. Section 951A gives us Global Intangible Low-taxed Income (GILTI), which if held in other than a C corporation, has very unfavorable tax consequences that can be greatly mitigated by using PPLI.

Hedge Fund Life Insurance

One distinct benefit of a PPLI policy is the ability to place tax inefficient investments like hedge funds into a tax-friendly environment. Some advisors have even coined the term, Hedge Fund Life Insurance, to highlight the advantages of combining hedge fund investments and life insurance into one tax-advantaged asset structure.

The numbers tell the story well on the chart below.

                                                     View Image in PDF format

The chart compares a taxable investment to one held in a PPLI account over the long-term. The very clear winner is the PPLI account. Even over a ten year period there is more than $3M more in the PPLI account. The chart does not even show the death benefit which is always more than the cash value account. In a properly structured policy, the death benefit is also tax-free, making a PPLI asset structure the undeniable victory in the quest for tax efficiency.

Conclusion

Let us summarize the tax advantages of holding investments in a PPLI asset structure:

Tax-deferred “inside build-up” of policy cash values. The industry has preserved the tax preferred treatment of life insurance for decades.

Non-recognition of capital gains. The policyholder has the ability to switch investment options within the product without triggering taxation. Life insurance separate accounts are legally the owners of the investments within variable insurance products. The life insurer receives a reserve deduction equal to its investment income.

The option of tax-free access to policy cash values through a partial surrender of the cash value and low-cost policy loans. A policyholder may take a partial surrender of the cash value and recover his tax basis in the contract first. Policy loans with a net cost of approximately 25 basis points per annum also receive income tax-free treatment.

The policy’s basis is its cumulative premiums. Once the policyholder has recovered his basis in the contract, the policyholder has a contractual right to a policy loan which allows the policyholder to borrow up to ninety percent of the policy cash value.

Income tax-free death benefit. The policy cash value grows on a tax-free basis. The policyholder can access investment gains within the policy on a tax-free basis during lifetime, and beneficiaries receive the death benefit income-tax free.

Estate tax-free death benefits through the use of third party ownership of the policy, such as an irrevocable life insurance trust (“ILIT”). IRC Sec 2042 provides that as long as the insured does not retain any incidents of ownership within the policy, the death proceeds will not be included in the taxable estate of the decedent.

Look no further if you wish to achieve the utmost in privacy, asset protection, and tax efficiency. You have arrived when you implement a PPLI asset structure. Please contact us today to let us know how we can assist you in creating your own bespoke PPLI asset structure.

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

Michael Malloy-CLU-TEP

 

 

 

#michaelmalloy #PPLI #EWP #privateplacement #lifeinsurance #advancedfinancialsolutions

 

 

 

EWP & Tax Shield-Part 2

Expanded Worldwide Planning-EWP and Tax Shield

Private Placement Life Insurance (PPLI) in Action

The Hampton Freeze & Beyond–Part 2

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The universality of Expanded Worldwide Planning (EWP) is not to be denied. This is objectified by Wikipedia. In the first sentence of their page on International Tax Planning, Expanded Worldwide Planning (EWP) is featured.

We are taking a cue from Wikipedia. Over the next few weeks, we will feature one of the six principles of Expanded Worldwide Planning (EWP). The six principles are: privacy, asset protection, tax shield, succession planning, compliance simplifier, and trust substitute. Today we feature the tax shield.

PPLI Benefits Non-U.S. Persons with Real Estate

There are many obstacles that non-U.S. persons face in investing 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.

Here is a list of the obstacles faced by non-U.S. persons investing in U.S. real estate:

Effectively Connected Income (ECI): Although non-U.S. investors’ gains from U.S. stock are generally not taxable, income and gain from their real estate investments are generally taxable under the 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 U.S. 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.

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.

Outstanding Results Realized

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.

An insurance solution using PPLI or a Private Placement Variable Annuity (PPVA) contract 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.

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.

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.

EWP & Tax Shield-PPLI with IDF vs. Other Real Estate Structures

  •                  CLICK HERE to enlarge image

We learn much valuable knowledge from your questions and comments. Please give us your thoughts on using PPLI in real estate structures.

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

Michael Malloy-CLU-TEP

 

 

 

#michaelmalloy #PPLI #EWP #privateplacement #lifeinsurance #advancedfinancialsolutions