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

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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.

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

Michael Malloy-CLU-TEP

 

 

 

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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

 

 

 

Expanded Worldwide Planning-EWP & Tax Shield

Private Placement Life Insurance (PPLI) in Action

The Hampton Freeze & Beyond–Part 1

Expanded Worldwide Planning-EWP & Tax Shield

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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. Perhaps the best comment made about the tax benefits of PPLI is from the October 1994 article in Offshore Investment by Professor Craig Hampton:

“I was visiting a gentleman at his home in the Piccadilly district of London. It was explained to me that his net worth exceeded US$100 million by a substantial margin. I noticed the presence of a computer terminal on a large desk in his den. It was surrounded by reams of paper dealing with offshore investing.

It soon became apparent that his affluence was due to his own efforts when he said to me: “You’re a bright young man who obviously knows his craft. But what can you tell me that I don’t already know about finances?”

I leaned forward and made this simple statement:

“Through the creative use of international life insurance, your financial affairs can be arranged so that you will never have to pay income taxes for the rest of your life!” The gentleman took serious notice, and thus was born the Hampton Freeze.”

The Hampton Freeze is the name coined for the various PPLI designs developed by Professor Craig Hampton in the early 1990s. These designs were utilized in cases where the premium was over $100M, but can also be employed for PPLI policies with lesser amounts of premium.

Oddly enough many of the tax benefits used for the sophisticated designs like the Hampton Freeze utilize the same tax benefits common to all life insurance policies:

  • tax-deferred growth of internal cash value;
  • no capital gains tax;
  • no income tax;
  • ability to access cash value through tax-free loans;
  • tax-free death benefit, if structured properly.

This is why savvy, wealthy families today are employing PPLI, (Private Placement Life Insurance), 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? At Advanced Financial Solutions, Inc., we counsel you to stop trying to be overly clever in the design of your asset structures. Why not use a financial tool that has been in use since Ancient Rome–life insurance? This will give you the best tax shield available today bar none.

A Brief History of Taxation

We will be concentrating on the ‘shield’ aspect of the tax shield, but before we go into more detail, let us speak briefly about the ‘tax’ aspect of our subject. What is the history of this thing we wish to shield?

In the ancient world there is recorded a system of taxation in Egypt around 3000-2800 BC. Documents show that the Pharaoh would tour his kingdom twice a year to collect taxes. In the Bible, we find this quote,

“But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children,” Genesis (chapter 47, verse 24, the New International Version.)

America was tax-free for much of its early history. This changed at the time of the Civil War, when large debts were incurred to fund the war against the South. In order to help pay for the war, the Congress passed the Revenue Act of 1861. The tax was levied on incomes exceeding $800 and was not rescinded until 1872.

In 1913, the 16th Amendment to the Constitution was introduced to pave the way to an income tax by removing the proportional to population clause. It was quickly followed by an income tax on people with an annual income of over $3,000. This tax touched less than 1% of Americans.

World War I led to three Revenue Acts that cranked up tax rates and lowered the exemption levels. The number of people paying taxes in the U.S. increased to 5%, and separate taxes were introduced for estates and business profits.

By 1940, the need for the U.S. to prepare for war and support its allies led to even more aggressive taxation. People with incomes of $500 faced a 23% tax and the rates climbed up to 94%. By 1945 $43 million Americans paid tax and the yearly receipts were in excess of $45 billion, up from $9 billion in 1941.

Who Pays the Most Tax Today?

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.

In Part 2, we will focus on the exceptional advantages of using PPLI with real estate. As always, we welcome your comments and questions.

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

Michael Malloy-CLU-TEP

 

 

 

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

 

 

 

 

 

The EWP Da Vinci Code – Part 3

Expanded Worldwide Planning–EWP & Asset Protection

Private Placement Life Insurance (PPLI) in Action

The EWP Da Vinci Code–Part 3

The EWP Da Vinci Code - 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.

Domestic Asset Protection Trust vs. Offshore Asset Protection Trust

Today we feature asset protection. In this segment we will discuss the development of Domestic Asset Protection Trust (DAPT) and Offshore Asset Protection Trust (OAPT). We again alert you to the fact that a simpler and more time-honored approach to asset protection is using life insurance. In a sense, asset protection comes automatically with Expanded Worldwide (EWP).

Advisors debate which is better: a DAPT or an OAPT. We say that they do serve a purpose for some clients, but why not adopt The EWP Da Vinci Code, and receive not only outstanding asset protection benefits, but all the six principles of Expanded Worldwide Planning (EWP) in one complete package?

Why bring Leonardo da Vince into this discussion? Because Leonardo said, “Simplicity is ultimate sophistication.” We have taken this as our model in implementing Expanded Worldwide Planning (EWP) in our PPLI asset 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 advanced guidance system (GPS), but you might be able to do without it.

“Asset protection does not come as an extra feature with Expanded Worldwide Planning (EWP), it is part of the package, just like turn signals on a new vehicle.” ~ Michael Malloy

As we will read, the controversial aspects of DAPTs and OAPTs arise out of public policy issues: is the use of this particular trust the best for the common good.

It is not our place to take a position on public policy issues. At Advanced Financial Solutions, Inc. our role is to assist wealthy families in their quest to implement the six principles of Expanded Worldwide Planning (EWP). Asset Protection is one of these six principles, and it is achieved through the financial planning tool of life insurance.

Life insurance is considered a societal benefit. Life insurance relieves governments from providing families with the needed cash at the death of the family’s income earner. Life insurance encourages savings for retirement through the accumulation of the cash value in the policy. PPLI is a form of life insurance, and thus bypasses much of the attention that is focused on trust structures.

In terms of the actual PPLI contract, all investments are held in separate accounts in the policy, thus, they are not in the insurance company’s general account. For this reason they are not subject to the creditors of the insurance company, if the company were to become bankrupt.

When government regulators look to curb what they would term abuses of public policy: in other words, wealthy families who have gone too far in stretching tax and trust law, aggressive trust structures are a frequent target.

We now give you a brief history of DAPTs and OAPTs, and the public policy issues that raise concerns with government regulators.

According to Wikipedia:

“An asset-protection trust is any form of trust which provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary. Such trusts are therefore frequently proscribed or limited in their effects by governments and the courts.”

What we might call the modern asset protection trust was formulated in the late 1980s, and the first jurisdiction to adopt it was in the Cook Islands. These trusts had spendthrift provisions and could be self-settled. These OAPTs had a one year fraudulent conveyance statute.

The Cook Islands legislation was soon followed by similar laws in the Cayman Islands, Belize, Nevis, the Channel Islands, the Isle of Man, and numerous other international financial centers.

In 1997, Alaska passed legislation allowing for irrevocable, discretionary, self-settled trusts. Ninety days later, Delaware followed suit, and as of this date some 16 states have passed DAPT legislation.

The controversy surrounding DAPTs and OAPTs arises from the degree to which OAPTs, in practice, often defeat deep-seated precepts of U.S. trust law. A key precept is that one ought not control and benefit from property and at the same time shield it from one’s creditors.

The underlying policy rationale for the non-enforcement of self-settled spendthrift trusts is clearly stated in A. Scott’s The Law of Trusts:

“It is immaterial that in creating the trust, the settlor did not intend to defraud his creditors. It is immaterial that he was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.”

For a U.S. wealthy family to form a DAPT, it is not necessary to form a trust in a jurisdiction outside the U.S., so this can make the process less expensive and time consuming. This takes us back to the old adage: “you get what you pay for.”

The greatest deficiency of DAPTs is that they are necessarily governed by U.S. law. The DAPT fails to achieve the jurisdictional separation required to fully protect the asset.

Since only a quarter of states currently have DAPT statutes, it is probable that states where litigation is taking place are those in which DAPTs are expressly prohibited as being against public policy. In a conflict-of-law analysis, it is difficult to envision any judge in a non-DAPT state agreeing to apply the laws of the DAPT state.

OAPTs are more secure for several reasons:

  • a foreign trust is not subject to the jurisdiction of the U.S. courts, so a U.S. attachment order will have no effect within that foreign jurisdiction;
  • furthermore, creditors seeking to reach the assets embark on independent legal proceedings in the foreign jurisdiction in which the trust is located;
  • even a favorable foreign judgment may be a hollow victory. The creditor still may not be able to satisfy that judgment from the assets held in the trust unless she proves that the transfer to the trust constituted a fraudulent conveyance.

Conclusion

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 trust that not only gives you asset protection, but the whole formidable array of benefits that Expanded Worldwide Planning (EWP) provides? To achieve this outstanding result, we suggest using an International Irrevocable Life Insurance Trust (ILIT) which owns a properly structured PPLI policy–The EWP Da Vinci Code.

The ILIT has been in use for decades; it has withstood numerous court challenges, and avoids the taint of opposing public policy that you acquire with DAPTs and OAPTs.

Regarding U.S,. tax laws, a properly designed International ILIT, governed by the law of a foreign jurisdiction, is treated virtually the same as a domestic ILIT. For wealthy U.S. families, or those families with a connection to the U.S., an International ILIT in combination with a properly structured PPLI policy, is arguably the most efficient structure for the integration tax-free investment growth, wealth transfer and asset protection.

Please contact us today to find out if The EWP Da Vinci Code is right for you.

 

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

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The EWP Da Vinci Code – 2

Expanded Worldwide Planning-EWP & Asset Protection

Private Placement Life Insurance (PPLI) in Action

The EWP Da Vinci Code–Part 2

The EWP Da Vinci Code - 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.

Quiet Protection of PPLI

Today we feature asset protection. Life insurance’s role as a protector of assets is quite different from our nature documentary example of a hunter and its prey. This role is more akin to the method used by dogs and cats in saving the lives of their families.

As you will read in the examples below, this protection was not brought about by physical strength. The type of strength we are speaking of is quietly hidden inside the frame of a small domesticated pet. This type of strength does not manifest until the proper circumstances arise. In this case, a threat to the master or family.

Life insurance in the form of PPLI can be seen to have this inherent quality of a quiet and inconspicuous protector of family assets.

Here are the examples:

From The Associated Press,

“Baby, a gray, white, and brown tabby cat, alerted a sleeping couple to a house fire in a Chicago suburb. Josh Ornberg and Letitia Kovalovsky were sleeping on a couch in the living room when Baby woke them, alarmed that a fire had broken out in the bedroom. The couple said that both they and the cat got out of the house safely.”

A CNN headline reads:

A German shepherd shielded his family from gunfire in a road rage incident. Michael Pearson’s article continues, “Following an altercation on an Atlanta road, the driver followed the family to a nearby strip mall and opened fire. The dog jumped in front of one of the children and a woman in the car and died of gunshot wounds behind a nearby building. Atlanta police Sergeant Gregory Lyon said,”They survived that only to find that their pet is now gone. It’s sad for the whole family, especially the day after Thanksgiving.”

Dog stays with owner for 20 hours after man breaks his neck in Michigan,” is the headline from Fox News. The story reads, “A Michigan man, Bob, slipped in the snow and broke his neck. With the closest neighbors far away, his golden retriever stayed with him for 20 hours. “By morning, my voice was gone and I couldn’t yell for help, but Kelsey didn’t stop barking,” Bob said. He lost consciousness, but Kelsey howled until a neighbor heard her and came to the rescue.”

Creditors vs. Debtors

By implementing the six principles of Expanded Worldwide Planning (EWP) through a properly structured PPLI policy, wealthy families achieve substantial asset protection benefits.

Historically trusts were employed to shield assets from excessive taxation, unreasonable claims of creditors, and bankruptcy. Trusts were developed in England originally to minimize the impact of inheritance taxes arising from transfers at death. The essence of the trust was to separate “legal” title, which was given to someone to hold as “trustee”, from “equitable title”, which was to be retained by the trust beneficiaries.

In both Roman times and as early as the 14th century in England, the use of trusts to shield lawful claims of creditors was recognized as a practice not conducive to sound public practice. Today we called it fraudulent conveyance.

The Romans utilized a type of trust known as a fideicommissum, which facilitated the transfer of assets at death. The Romans were also aware of the abuses of trust that went against public policy. Their great legal scholars Ulpian and Gaius developed the basic framework for the fraudulent conveyance laws as we know them today.

In England in the late 14th century, two laws were enacted that aimed to end popular types of fraudulent conveyance that were then in practice. One law sought to prevent debtors from conveying their lands to their friends until their creditors had come and gone away. Another law sought to end the practice of temporarily conveying their lands to “Lords and other great Men of the Realm” so as to deter creditors.

Another key component to our own asset protection laws are spendthrift clauses. A spendthrift provision creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her.

These spendthrift provisions first became popular in the U.S. in the 19th century, and were controversial. Not just a few commentators thought that spendthrift clauses were a very bad idea. John Chipman Gray, a Harvard Law Professor whose half-brother (Horace Gray) was a U.S. Supreme Court Justice, registered his objections this way:

“The general introduction of spendthrift trusts would be to form a privileged class, who could indulge in every speculation, could practice every fraud, and, provided they kept on the safe side of the criminal law, could yet roll in wealth. They would be an aristocracy, though certainly the most contemptible aristocracy with which a country was ever cursed.”

Notwithstanding such objections, the spendthrift trust, of course, survived and thrived U.S. law.

Yet, such trusts had their limitations; for example, some states carved out exceptions for creditors holding judgments for unpaid alimony and child support. By far the biggest restriction was against spendthrift trusts which were self-settled trusts. That great commentator on trust law, George T. Bogert, firmly believed that the spendthrift provisions of self-settled trusts were unenforceable against public policy, and wrote:

“To hold otherwise would be to give unexampled opportunity to unscrupulous persons to shelter their property before engaging in speculative business enterprises, to mislead creditors into thinking that the settlor still owned the property since he appeared to be receiving its income, and thereby work a gross fraud on creditors who might place reliance on the former prosperity and financial stability of the debtor.”

In the late 1980s in the U.S. most legal practitioners were in agreement that spendthrift clauses could protect the rights of beneficiaries of trust, but you could not create a trust that exempted your assets from creditors, a self-settled spendthrift trust.

This leads us to our last segment of our Expanded Worldwide Planning (EWP) drama or play of opposites.

We look forward to bringing you Part 3 in our series on Asset Protection soon. Please give us your thoughts on what we have brought you so far.

Learning from each other is one of the great pleasures in life.

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

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Expanded Worldwide Planning-EWP & Asset Protection

Private Placement Life Insurance (PPLI) in Action

The EWP Da Vinci Code–Part 1

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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.

The EWP Da Vinci Code

Today we feature asset protection. As you will read, our asset protection model is called The EWP Da Vinci Code. Our model is highly effective, yet conservative, and much less exposed to scrutiny 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–life insurance, in the form of PPLI.

Asset Protection is a prudent subset of financial planning. As we will read later in this article, some consider asset protection a deceptive, sleight-of-hand trick that deprives creditors from receiving what is lawfully due to them. The law is a double-edged sword that cuts both ways. Our article deals with both sides of this sharp blade.

We take an expansive approach to asset protection and Expanded Worldwide Planning (EWP), and how Private Placement Life Insurance (PPLI) produces a simple and straightforward solution to this drama? What is the drama you correctly ask?

We will call our drama the Expanded Worldwide Planning (EWP) drama, since this is, in a sense, our main character. Our sub-plots in this drama are:

  • One Side of the Sharp Blade vs. the Other Side of the Sharp Blade
  • Hunters vs. Prey
  • Creditors vs. Debtors
  • Domestic Asset Protection Trust vs. Offshore Asset Protection Trust

Our theme of opposites is aptly expressed by the opening lines of A Tale of Two Cities by Charles Dickens. These profoundly simple lines express the hopes and fears of all ages:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way….”

Why call it a drama? Our clients come to us to implement the six principles of Expanded Worldwide Planning (EWP) by incorporating PPLI into their asset structure. Our wealthy clients have achieved this great wealth for the most part through hard work, intelligence, and some element of being in the right place at the right time. They wish to be good stewards of this wealth, and pass it onto future generations, but encounter various antagonists. Hence, a drama unfolds.

Both Sides of the Sharp Blade

What we term the Sharp Blade is our legal system, particularly in the U.S. According to One Legal, it is estimated that there are more than 40 million lawsuits filed in the U.S. every year.

For better or worse, the legal system is adversarial. If you are sued you must defend yourself or risk losing the lawsuit by inaction. Both sides present their best case and a judge or jury decides what shall be done with the issue, or the parties negotiate a settlement between themselves before the case goes to trial.

If you are a professional person or own a business, you are at risk of being sued, and it behooves you to protect yourself. Different types of insurance can mitigate the risk for you, but not for all situations. If insurance does not come to your rescue, then, your assets are exposed to being seized and sold to pay a judgement against you.

Wealthy families, who may be immigrating from a country like China that is not nearly so litigious, may not even consider this possible threat to their assets. Expanded Worldwide Planning (EWP) through the proper implementation of a PPLI policy offers asset protection by its very nature. Not as a separate complicated trust structure, but because life insurance has a very favored position in the eyes of the law in respect to asset protection. This will be explained in more detail in other sections of our drama.

Hunters vs. Prey

Watch a nature documentary and you will see this sub-plot of our Expanded Worldwide Planning (EWP) drama unfold. Frequently, the strong and fast feast on the weak and slow, but not always. Nature has a stealthy way of protecting the weak and slow. You might call this method camouflage, hiding in plain sight. Instead of trying to run away from predators, or overpower them, they quietly remain in the same place.

Some asset classes are favored by law. These assets provide the debtor with a greater level of protection from the claims of creditors than would other asset classes. This is so for life insurance, because it is considered essential for the debtor’s family to maintain at least a minimum level of well-being, and not become a burden to that state.

The federal bankruptcy exemption for life insurance policy unmatured death benefit is quite small, currently only $12,500. Many states provide a more extensive exemption of life insurance than federal law. The states vary widely in whether they exempt only the beneficiaries of the life insurance contract, family members of the insured, or the owner of the contract. There is also a wide disparity on the protection of the cash value, if any, inside the contract of life insurance. This protection also differs as to whether the exemption is applied in a bankruptcy context or a non-bankruptcy context.

Please contact us today to find out if The EWP Da Vinci Code is right for you. We will continue next week with Part 2. Look forward to your questions and comments.

 

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

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Expanded Worldwide Planning-EWP & Privacy

EWP-PRIVACY

Private Placement Life Insurance (PPLI) in Action

Part 1: Privacy

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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 PRIVACY. Privacy is a key element. With FATCA, CRS, and Registers of Beneficial Ownership our clients are looking for ways to keep their affairs private, and still be compliant with tax authorities worldwide. But as you know, it is a cat and mouse game that takes study and constant attention to detail. As you can see from our image, we don’t quite know who is winning.

“Behold, I set before you this day a blessing and a curse….” (Deuteronomy 11:26, King James Bible.) This is an apt phrase to describe the context of privacy today, where with a touch of a keystroke you can send megabytes of data around the world in an instant.
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?
This thought is expressed by Andrew Grove, co-founder and former CEO of Intel Corporation. Mr. Grove’s thoughts on internet privacy appear on the Privacy page of Wikipedia:

“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.”

Expanded Worldwide Planning (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 call the journalistic authors of the Panama Papers and the Paradise Papers heros of a free press. Others say that these same journalists were thieves, who unlawfully stold 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 a properly structured PPLI policy protect the families whose financial information was published for the entire world to see?
The privacy principle of Expanded Worldwide Planning (EWP) accomplishes its objective in several key ways:

  • Upon transfer into the PPLI policy, the insurance company becomes the beneficial owner of all the assets in the policy;
  • If there is reporting to a tax authority for the asset structure, only one number is reported. This is the total cash value of all the assets in the PPLI policy. The individual assets are not reported;
  • The bank account that is usually opened in connection with a PPLI policy is opened in the name of the insurance company, not the policyowner. The policyowner has full access to the funds in the bank account in accordance with the assets inside the policy.

The Privacy Paradox
In connection to privacy, there is a concept called the privacy paradox that was first discussed by Bedrick, Lerner, and Whitehead, “The privacy paradox: Introduction, News Media and the Law.” We quote below from the Wikipedia Privacy page:

“The privacy paradox is a phenomenon in which online users state that they are concerned about their privacy but behave as if they were not. While this term was coined as early as 1998, it wasn’t used in its current popular sense until the year 2000.”

The authors go onto to explain this in more detail:

“Some researchers believe that decision making takes place on an irrational level, especially when it comes to mobile computing. Mobile applications are built up in a way that decision making is fast. Restricting one’s profile on social networks is the easiest way to protect against privacy threats and security intrusions. However, such protection measures are not easily accessible while downloading and installing apps.”

There is also another type of Privacy Paradox pertinent to Expanded Worldwide Planning (EWP) in the reporting of data breaches and news reporting on wealthy families. This is aptly put by Filippo Noseda of the Mischon de Reya law firm in London:

“It is somewhat curious that serious newspapers who have been covering both the private banking scandals and the erosion of privacy seem unable to make the connection between data protection on the one hand, and the Common Reporting Standard (CRS) and beneficial ownership registers on the other.”

Mr. Noseda also draws our attention to published material by The European Data Protection Supervisor (EDPS) where he questions the OECD’s goal of total financial transparency.
Mr. Noseda writes:

“As if they were living on planet Europa rather than in Europe, the European Parliament, the Organization for Economic Co-Operation and Development (OECD), and politicians show complete disregard for the warnings raised by their own data protection bodies and instead appear hell-bent on introducing a system of total transparency.”

We have grown accustomed to the idea that transparency is a good thing, something that supports the common good. Like many concepts, if taken to an extreme, it becomes its opposite. A weapon in the hands of governments hungry for wealthy citizens’ tax dollars. As proponents of Expanded Worldwide Planning (EWP), we must question this overzealous approach to tax collection.

The History of Privacy
Let us end with some general historical information on privacy, and how Expanded Worldwide Planning (EWP) and PPLI can further the aims of wealthy families seeking increased privacy, asset protection, and tax efficiency.
We quote two eye-opening passages by Greg Ferenstein’s “The Birth and Death of Privacy: 3,000 Years of History…,” courtesy of Medium:

“Privacy, as it is conventionally understood, is only 150 years old. Most humans living throughout history had little concept of privacy in their tiny communities. Sex, breastfeeding, and bathings were shamelessly performed in front of friends and families.”
“Privacy-conscious citizens did find more traction with what would become perhaps America’s first privacy law, the 1710 Post Office Act, which banned sorting through the mail by postal employees.”

This last quote seems quaint in light of the large-scale, present-day concerns of unauthorized data sharing by social media sites.

Expanded Worldwide Planning (EWP) and PPLI are employed by our firm Advanced Financial Solutions, Inc. to not only give you enhanced privacy, we also keep you compliant with tax authorities worldwide. Our firm can be confident of our success, because PPLI and Expanded Worldwide Planning (EWP) asset structuring greatly simplifies the process, and in addition, gives you the privacy that you seek.
We invite you to take advantage of our services, and would enjoy hearing your comments and questions about the topic of privacy. Please contact us today for a no-obligation, introductory consultation.

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

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