Asset Protection and Tax-Free Investments For the Moderately Wealthy

Asset Protection and Tax-Free Investments For the Moderately Wealthy




Life insurance is an underutilized, but potentially versatile and highly efficient investment means. It is useful not only for wealthy families. An individual or family having a net worth of only $1 million or already less is financially able to fund an offshore, irrevocable life insurance trust (ILIT) that provides a life insurance assistance, asset protection, tax-free growth of a variable high-provide investment portfolio, tax-free policy loans during the life of the insured, tax-free payment of policy proceeds to the trust upon death of the insured and tax-free distributions to beneficiaries.

It is well known that standard whole and universal life insurance policies provide tax-deferred growth of the policy’s cash or investment value. The cash value of a standard policy, however, is part of the general investment fund of an insurance company. Growth of cash value within the policy is generally comparatively low, usually a few percent yearly. Also, the policy is only as obtain as the insurance company. Policy funds are generally commingled with the insurer’s general fund, and the policy owner or beneficiaries basically are unsecured creditors of the life insurance company. In case of bankruptcy of the insurer, policy assets could be lost.

Private placement life insurance (PPLI) is a privately negotiated life insurance contract between insurance carrier and policy owner. PPLI offers several advantages compared to standard policies. Policy funds are held in segregated accounts that protect the funds against the carrier’s creditors. PPLI enables a wider range of investment opportunities managed by a specialized investment adviser chosen by the policy owner. Finally, policy costs are transparent, negotiable and typically lower than off-the-shelf insurance products. A problem with domestic insurance companies offering PPLI in the U.S., however, is that they typically require a minimum insurance premium commitment of $10 million to $50 million.

Offshore PPLI policies are more popular than domestic PPLI based in United States. Offshore insurance companies are not unprotected to strict SEC and state insurance regulations in the U.S., which limit the types of investments obtainable to domestic insurance policies. Further, offshore PPLI policies are not unprotected to the state premium taxes charged by the various states. Although a policy issued by a foreign insurance carrier is unprotected to a 1% U.S. excise tax, this is balanced by not being unprotected to the federal deferred acquisition cost (DAC) tax. One of the major benefits of offshore PPLI is that it is offshore, meaning that the offshore life insurance carrier can be chosen so that it is not unprotected to the jurisdiction of U.S. courts. Offshore PPLI typically has a minimum premium commitment of $1 million or already less over five to seven years, and fees associated with offshore PPLI are typically about 1.5% to 2% of premium load.

An offshore irrevocable life insurance trust (ILIT) optimizes tax free wealth building and the financial security of PPLI beneficiaries, in addition as providing protection of policy assets and other trust character against the claims of beneficiaries’ creditors. An offshore trust is not unprotected to the jurisdiction of U.S. courts and other U.S. government agencies. A number of offshore countries have adopted legislation specially designed to protect trusts registered in their jurisdictions against attack by outside courts and governments. An offshore trust jurisdiction typically requires that a trust pay an annual government registration fee and use the sets of a local trustee. Since trust business is an important revenue source and contributes to the local economy, offshore jurisdictions are motivated to protect the integrity of locally registered asset-protection trusts against outside creditors of trust beneficiaries.

In a hypothetical example, a U.S. taxpayer establishes an irrevocable offshore asset protection trust, for example, in the Cook Islands (South Pacific) or Nevis (Caribbean). Initially or over the next five to seven years, the individual irrevocably contributes to the trust assets having a value equal to the current lifetime exemptions for estate tax and generation skipping move tax (GSTT), for example, $1 million. The U.S. taxpayer designates his lifetime exemptions to the trust contributions, thereby creating a dynasty trust that will be free of U.S. estate and GST tax perpetually. If the trust assets are not invested in life insurance, then U.S. income tax and capital gains tax are paid on investment growth in the trust. however, if and when trust assets are invested in a life insurance policy, investment growth is not taxed.

Also, when policy proceeds are paid to the trust (as policy beneficiary) upon death of the insured, no income tax, no estate tax and no GST tax are payable. The overall consequence is that trust beneficiaries assistance from tax-free life-insurance investment growth and tax-free wealth move perpetually. The tax advantages of life insurance are obtainable with traditional policies, not just by PPLI. An advantage of PPLI is greater investment flexibility, which allows greater investment growth possible. An additional advantage of a preferred structure including a self settled, irrevocable life insurance trust is that the settlor (the person establishing and funding the trust) may assistance from the trust during his lifetime by tax free insurance-policy loans, at the discretion of the trustee. Initial specialized fees (legal and accounting sets) for setting up a preferred structure are typically in a range of about from $20K to $50K. Annual trust and trustee fees are generally about $5,000.

complete compliance with U.S. tax law is an important characteristic of a preferred structure that includes an offshore asset protection trust owning offshore PPLI. In fact, the preferred structure recommended here is tax neutral, that is, there are no tax advantages or disadvantages resulting from being offshore. Formation and administration of the offshore ILIT structure is slightly more complicated and expensive than a domestic trust. But, unless there are creditor problems, the trust is administered and treated as a U.S. trust for U.S. tax purposes. Although a few additional forms must be submitted to the IRS yearly, the tax situation is the same whether onshore or offshore. The offshore advantages are very obtain asset protection, lower insurance costs, and greater investment flexibility.

The greater investment flexibility of offshore PPLI, especially compared with traditional life insurance, is the ability to invest policy funds in high-growth assets, such as hedge funds or start-up companies. As a formality, policy assets are held in segregated accounts owned and managed by the insurance company. Typically, the insurance company directly or indirectly hires an asset manager recommended by the policy owner, often the same manager who manages the settlor’s other non-trust assets. Some of the same benefits of a preferred structure can be achieved using less preferred structures. For example, a traditional (non-private-placement) offshore life insurance policy owned by an offshore life insurance trust provides asset protection and popular tax treatment (i.e., no taxes on income, capital gains and estate), but policy assets would be held in the insurer’s general fund and investment returns would be lower.

An irrevocable life insurance trust (ILIT) and an offshore PPLI policy can be funded using various types of assets, basically anything to which a value can be attached: stocks, bonds, hedge funds, commodities, collectibles, real estate, business enterprises. Equity stripping of assets located in the United States by loans on real estate and business equipment can be used to generate cash for contribution to an offshore asset-protection life-insurance trust. Estate tax and GSTT exemptions can be leveraged by contributing assets to the life-insurance trust before high growth occurs. Promissory observe sales and discounting of closely-held character can also be used to leverage estate tax and GSTT exemptions. A married associate can use both spouses’ lifetime exemptions to fund the trust.

The long-term outlook for the US dollar and the U.S. economy is bad. The U.S. manufacturing base is deteriorating and moving overseas. sets such as software development, technical sustain, accounting and legal work are migrating from the U.S. to low-paying developing countries. Consumption of imported petroleum and cheap manufactured goods causes a continued drain of dollars out of the U.S. economy, which are then borrowed back coupled with interest. The U.S. national debt of $13.3 trillion (August 2010) is insurmountable, unless it is paid down by inflation.

Federal spending on the military, foreign wars and domestic entitlement programs is seemingly uncontrollable, and the annual deficit will only be contained by draconian tax increases. The nonpartisan Peter G. Peterson Foundation reports that the federal government as of September 2009 faces a total $61.9 trillion in unfunded limitations over the next 75 years that are not covered by expected tax revenue. The Government Accountability Office has expected that the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.

The individual states and local jurisdictions are sinking under the weight of ill-conceived and irresponsible compensation and pension plans for civil servants, in addition as federally-mandated social engineering and entitlement programs. Whether by the expected Obama tax hike or by some other stimulus, sooner or later, the U.S. Congress, states and local governments will drastically increase effective tax rates for U.S. residents. The U.S. economy will probably not disintegrate overnight, although it almost did in September 2008. Nevertheless, as a functional matter, earning money and keeping it will become much harder in the coming years. Further, any person living in the U.S. can be sued by anyone for almost any reason, and the cost of defending a lawsuit can be as much or more than simply paying to make it go away. An individual or business owning meaningful assets located in the U.S., or an individual trying to earn a living or run a business, is hostage to these realities.

The antidote, or vaccine, against these threats to financial well being is a self-settled asset-protection PPLI irrevocable life insurance trust (also known as a dynasty trust or GST trust). The preferred structure provides several meaningful benefits to the settlor and other beneficiaries. It moves substantial assets offshore, where U.S. courts or other government agencies cannot levy them. It allows tax free growth of a global, variable investment portfolio managed by a trusted financial adviser in complete compliance with U.S. tax laws. At the discretion of the trustee, trust assets (including tax-free insurance policy loans) are obtainable to the settlor during his lifetime. Upon death of the insured, policy proceeds are paid tax-free to the trust. The assets in a well-managed dynasty trust grow perpetually. consequently, the dynasty trust secures the financial well being of spouse, children and their descendants perpetually. These benefits are especially valuable in a world of punitive taxes, deteriorating employment opportunities, decreasing incomes, mismanaged economies, overpopulation, disintegrating societies, unnecessary wars and corrupted governments. by creative legal and financial planning, these benefits are now obtainable to moderately wealthy individuals and families.

Warning & Disclaimer: This is not legal advice.

Copyright 2010 – Thomas Swenson




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