Domestic & International Planning with Private Placement Life ...
Transcript of Domestic & International Planning with Private Placement Life ...
Domestic & International Planning
with Private Placement Life Insurance
STEP Silicon Valley Palo Alto, CA July 21, 2016
Robert D. Colvin (Houston, Texas)
High taxes on investment income
Leverage $5+ million gift tax exemption
Hedge on poor investment performance
Asset Protection
Sticky investment assets
Increased Pressure on International Planning
Separation of Measuring Life From Provider of Funds
Permanent Tax Exemption Offered By Life Insurance
Structuring Flexibility
Why the Interest in PPLI?
Traditional Retail Life Insurance Private Placement Life Insurance
Death benefit purchase Investment purchase
Maximum death benefit Minimum death benefit
Small premium deposits over multiple years Large premium deposits over 1 to 5 years
Minimum guarantees No investment performance guarantees
Back end fees No surrender charges
Registered investment options Non-registered, alternative investment options
Retail pricing Institutional pricing
No flexibility Flexibility
Limited transparency in pricing Full transparency in pricing
What makes PPLI different?
3
Who is on the team?
Team Players
Insured Policy Owner
Reinsurer
Investment Manager
Custodian
Carrier
Underwriters Insurance Consultant
Legal Counsel
Private Banker
Team Players
Insured Policy Owner
Reinsurer
Investment Manager
Custodian
Carrier
Underwriters Insurance Consultant
Legal Counsel
Private Banker
Team Players
Insured Policy Owner
Reinsurer
Investment Manager
Custodian
Carrier
Underwriters Insurance Consultant
Legal Counsel
Private Banker
Team Players
Insured Policy Owner
Reinsurer
Investment Manager
Custodian
Carrier
Underwriters Insurance Consultant
Legal Counsel
Private Banker
Team Players
Insured Policy Owner
Reinsurer
Investment Manager
Custodian
Carrier
Underwriters Insurance Consultant
Legal Counsel
Private Banker
Income Tax Benefits
$$ $$
Portfolio Investments
Trust, LLC or FLP
PPLI Policy
$$
Tax Free Inside
Build-Up
X
PPLI Policy
A
Trust, LLC or FLP
$$
B C D E X Y
Tax Free Shifting Among
Investments
Income Tax Benefits
PPLI Policy
$$ $$
Trust, LLC or FLP
$$
Tax Free Access to
Policy Values
$$
Portfolio Investments
Income Tax Benefits
Investable Access (Below the Policy) Selection of investment manager Investment guidelines Diversification Rules Investor control issues
Consumable Access
Access to Policy Values
Investable Access
Consumable Access (Policy Contract) Withdrawal and loan rights Limitations on % of CSV can be borrowed Tax impact of withdrawals and loans MEC rules
Access to Policy Values
If a MEC: Lifetime “distributions” are taxable as
ordinary income “Distributions” include loans, withdrawals and payments
upon lapse or surrender
Additional 10% surtax on Distributions before age 59½
Modified Endowment Contracts MEC Consequences
If NOT a MEC: Tax-free withdrawals up to basis
Tax-free loans from & against contract
No 10% surtax
Modified Endowment Contracts MEC Consequences
Single Premium = MEC
Multiple Premium = Non-MEC
Modified Endowment Contracts “Seven Pay” Test
Cheat Sheet
Tax Free Death Benefit:
• Portfolio Investments
• True Insurance Benefit
PPLI Policy
$$ $$
Portfolio Investments
Trust, LLC or FLP
$$
Income Tax Benefits
Death Benefit as hedge against poor
investment performance PPLI Policy
$$ $$
Portfolio Investments
Trust, LLC or FLP
$$
Income Tax Benefits
Male, Age 50 Preferred Non-Tobacco Taxable Investment: $5,000,000 single deposit; PPLI: $1,000,000 per year for 5 years
50% Income Tax Rate • 7% Gross Rate of Return
21
$11.9M IRR: 6.4%
$8.7M IRR: 3.5%
$55.6M IRR: 6.5%
$19.8M IRR: 3.5%
Taxable Investment vs PPLI
Individual, Trust, or FLP
Life Insurance Policy or DVA
Policy Contract
Below the Policy Segregated Account
Above the Policy
Case Analysis Process
Above the Policy
Ownership Issues Gift and Estate Planning
Direct Ownership vs. Trust vs. FLP
1035 Exchanges
Funding Alternatives
Asset Protection
Ownership Issues Funding Alternatives Source of Funds Individual, Corporate, Trust or FLP
Premium financing Asset Protection
Above the Policy
Ownership Issues
Funding Alternatives
Asset Protection Policyowner Beneficiaries Insured
Above the Policy
Insurance as a protected asset
Varies state by state
Unlimited exemption (Texas & Florida)
Death Benefit exemption
Cash value protections
Onshore vs offshore
Creditor Protection
Debtor’s Dependents Spouse Children
Policy Beneficiaries Relationship of Owner to Beneficiary
Policy Owner Relationship of Owner to Insured
Who is Protected?
Increased Death Benefit protections when paid to dependents Cash Value protections more limited Certain $$ limitations A few States have unlimited exemptions
(such as Texas and Florida) Exemption may count against
bankruptcy personal property exemption amounts
How much is Protected?
Fraudulent conveyances in funding
Conversion of non-exempt assets into exempt assets
Certain contracts purchased within 6 months or year of bankruptcy
Exceptions to Protection
Protective contract language Restrictions on assignments Duress clauses
Restricted Cash Value products Fraudulent conveyance limitations
Holding structures Trusts & holding companies
Offshore Policies
Trust Estate tax exclusion Generational planning Asset preservation & creditor protection
Trust Planning Benefits
…but does not solve the income tax problem.
Trust Estate tax exclusion Generational planning Asset preservation & creditor protection
Trust Planning Benefits
….Private Placement Life Insurance!!!
Above the Policy
Policy Contract
Below the Policy Segregated Account
Individual, Trust, or FLP
Case Analysis Process
Life Insurance Policy or DVA
PPLI
Trust Framework Settlor Trustee
Beneficiaries
contribution
benefits
Parallel Frameworks
Settlor Trustee
Policy Owner Insurer
Beneficiaries
contribution
benefits
X X
Policy qualification requirements
Cash Value Designs
Onshore vs Offshore vs §953(d) Carriers
Underwriting Limitations & Reinsurance Capacity
MEC vs. Non-MEC
Policy Contract Planning Issues
What does “U.S. compliant” mean?
Section 7702(a) minimum Death Benefit requirements
Cash Corridor & Guideline Premium tests
Cash Value Accumulation test
Policy Qualification Requirements
Why is it Non-Compliant? Death Benefit ratio to: contributed premiums; or cash value.
Taxable on: Annual increase in net surrender value; plus Cost of insurance coverage; less Premiums contributed that year.
Death Benefit in excess of NSV is tax-free.
Non-U.S. Compliant Contracts
Significance of “Cash Value” Basis of “U.S. Compliant” Tests Measure of MEC Taxable Amount Consequences of “Non-Compliant” Policies
Tax Definition of “Cash Value” Contract Definition of “Cash Value”
Cash Value Terms
Significance of “Cash Value” Tax definition of “Cash Value” is greater of: Maximum amount payable on lifetime surrender of the
Policy; or Maximum amount the policy owner can borrow out of
the policy.
Contract definition of “Cash Value”
Cash Value Terms
Significance of “Cash Value”
Tax Definition of “Cash Value”
Contract Definition of “Cash Value” Surrender proceeds
Loan terms and limits
Restrictions on Cash Value
Cash Value Terms
Intentionally Non-Compliant Policy
Freeze increase in Cash Value
Why use an FCV Policy? Inability to obtain large reinsurance coverage
Reduce COI charges
Preservation of assets for lower generations
Only available from International Carriers
Frozen Cash Value Policies
Above the Policy
Policy Contract
Below the Policy Segregated Account
Individual, Trust, or FLP
Case Analysis Process
Life Insurance Policy or DVA
Income TaxExemption
RegulatoryRestrictions
DomesticCarrier
Broad U.S.
Non-U.S.Carrier§953(d)ElectingCarrier
Domestic vs Offshore Insurance
Reserves basis of tax accounting Tax-exempt to extent increases reserves
for benefit of policyholder
Domestic U.S. Carrier (Exempt Income)
Income TaxExemption
RegulatoryRestrictions
DomesticCarrier
Broad U.S.
Non-U.S.Carrier
Limited Non-U.S.
§953(d)ElectingCarrier
Domestic vs Offshore Insurance
Non-U.S. source income Foreign investment funds Local source country taxation?
U.S. source capital gains Excluding gains on U.S. “real property interests”
U.S. source “portfolio”, Treasury and bank interest
Non-U.S. Carrier (Exempt Income)
U.S. source dividends, rents, royalties and non-portfolio interest
Application of Reserves Accounting? Gains attributable to “real property interests”?
Income “effectively connected” with a U.S. trade or business? Careful investing thru certain partnerships
Non-U.S. Carrier (Taxable Income)
Income Tax Exemption
Regulatory Restrictions
Domestic Carrier
Broad U.S.
Non-U.S. Carrier
Limited Non-U.S.
§953(d) Electing Carrier
Broad
Non-U.S.
Domestic vs Offshore Insurance
Above the Policy
Policy Contract
Below the Policy Segregated Account
Individual, Trust, or FLP
Case Analysis Process
Life Insurance Policy or DVA
Investor Control Doctrine
IRS Position: Treat policyowner as direct owner of segregated account assets if…
Exercise too much control over segregated account investments (Subjective Test); or
Invest directly in publicly available investments (Public Investment Limitation).
Focus on contract holder
“Too much” control or communication
Pre-arranged plans
Facts & circumstances determination
Investor Control Issue (Subjective Test)
Objective standard Focus on nature of underlying
investments Accessible only thru purchase of insurance or
annuity contract
Tie-in to diversification rules
Investor Control Issue (Public Investment Limitation)
Revenue Rulings 2003-91/-92 2005 changes to Reg. §1.871-5 Webber case (2015)
70,000+ emails on investments Privately controlled companies Frozen Cash Value policy Restrictions deemed elusive
No penalties – Reliance on counsel
Investor Control Issue (Current Status)
One Investment < 55% Total Value Two Investments < 70% Total Value Three Investments < 80% Total Value Four Investments < 90% Total Value Need At Least Five Investments
55% 15% 10% 10% 10%
Various Investments
General Diversification Rules
PPLI or DVA
Owner
Apply only to “Variable Contracts” A contract which provides for:
allocation of the amounts received to an
account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company... and the contract benefits are adjusted on the basis
of the investment return and market value of the account.
Non-U.S. policies??
Diversification Rules
Taxable on Inside Build-Up:
Annual increase in Cash Value, less
Premiums contributed that year.
Note: Taxable portion does not include COI charges
Diversification Rules: Effects of Non-Compliance
Investment Management
$$ $$
Portfolio Investments
Trust, LLC or FLP
PPLI Policy
$$ • Separately
Managed Accounts
• IDF’s
IRS says “OK” but factual determination
Discretionary authority
No specific instructions from clients But broad investment guidelines permitted
Separately Managed Accounts
Access only thru insurance products “Variable contracts” Onshore vs. Offshore Policies
Frozen Cash Value Policies
Clone and Feeder Funds
Insurance Dedicated Funds
Owner
Diversified Portfolio
•Available to the public? •Tie-in to Investor Control •Insurance Dedicated Funds
Fund
PPLI Policy
IDF Look Thru Rule
Diversification Look through testing
“Variable contracts” limitation
Investor Control Access only thru insurance products
Important even for Non-Compliant Policies
IDFs show you care!!!
Why Insurance Dedicated Funds?
Build your own fund
Multi-Fund Series Platforms Cheaper to set up & faster to market Administrative services Insurance specific reporting Qualification on carrier platforms Technical support on insurance issues May be added cost to the structure
Insurance Dedicated Funds
Above the IDF Who are your investors? Carrier type
Domestic, 953(d) or International Carrier?
Policy type US compliant, Non-US compliant, or FCV
Below the IDF U.S. vs Non-U.S. investments Liquidity issues
Structuring IDFs
Tax-free inside build-up
Tax Exemption
Tax-free Death Benefits Tax-free lifetime access Subject to MEC Rules
Tax-free inside build-up
Tax Deferral
Death Benefits (if any) are taxable
Distributions, withdrawals, and loans are taxable
10% Surtax on pre-mature withdrawals
Life Insurance Policy Annuity Contract
DVA Selling Points
Conservative strategy for U.S. tax deferral Fast & simple to purchase Creates “sticky” investment assets Avoids PFIC taxation on foreign investment
funds Annuity payout opportunity
DVA Limitations U.S. tax triggered on: Any access to DVA funds by client Transfers or sale of the DVA Gifts of the DVA
10% penalty tax on withdrawals prior to age 59½
Non-Natural Person limitation
Non-Natural Person Owners
No tax deferral if Non-Natural Person Owner
Exception: Acting as “Agent” for Natural Person Trusts with only Natural Person Beneficiaries Grantor Trusts
Corporations = Generally no exceptions Partnerships = Probably no (or limited) exceptions
Estates by reason of Holder’s Death
Separate Account Investments
Individual
PPLI (Non-MEC)
• Tax-free accumulation
• Tax-free withdrawals for retirement (non-MEC)
• Tax-free death benefit protection
• Hedge against investment performance
• Asset protection
After Tax Funds
Supplemental Retirement Plan
U.S. Trust
• Tax-free accumulation
during insureds’ lifetimes • Tax-free lifetime access • Tax-free death benefit • Hedge against investment
performance
Life Insurance Policy
Existing U.S. Trust Enhancement
Separate Account Investments
FLP
• Partners share in benefits • Tax-free accumulation • Tax-free lifetime access • Exit as tax-free death benefit • Hedge investment
performance
Life Insurance Policy
Separate Account Investments
FLP Enhancement
Client
Trust
PPLI Policy
Segregated Account
CONSOLIDATION STRATEGY
Client’s Existing Life Policies
§1035 Exchange
Additional Premiums
Additional Premiums
“Passive Foreign Investment Company” Foreign mutual funds
Foreign hedge funds
Foreign collective investment schemes
International Investing (PFIC Rules)
PFIC
US Investor
$$ PFIC
•Ordinary income
•Interest Charge
•Reporting PFIC PFIC PFIC PFIC
PFIC Planning
DVA or Life Policy
US Investor
$$ No Attribution through
Insurance Products
PFIC PFIC PFIC PFIC PFIC
PFIC Planning
• Extend beyond
grantor’s lifetime. • Avoid U.S. tax and
interest charge on distributions to U.S. beneficiaries.
• Avoid home country tax issues for NRA settlor.
• Establish dynasty trust free of U.S. gift, estate and GST taxes.
NRA
Offshore Trust
Non-MEC Life Policy
U.S. Beneficiaries
Separate Account Investments
NRA Funding For US Beneficiaries
• Exemption or deferral of tax while a U.S. tax resident
• Avoid U.S. gift, estate and GST taxes
• Beware: • U.S. withholding tax • §684 tax issues
Client
Trust? (Onshore or Offshore?)
Life Policy or Annuity?
(Onshore or Offshore?)
Separate Account Investments
Pre-Immigration Planning
Insurance as Estate Tax Blocker
DVA or Life Policy
$$ $$
US Portfolio Investments
NRA Individual
$$
• No US income tax on portfolio income
• Concerns re home country income taxation
• Home country concerns re trusts
• US estate tax concerns
FATCA & CRS
FBAR (Form TDF 90-22.1)
Form 8938, Specified Foreign Financial Assets
Reporting Obligations
Robert D. Colvin & Associate 12 Greenway Plaza, Suite 1100
Houston, TX 77046
Direct: (713) 666-6045 [email protected] Fax: (713) 666-6038
Circular 230 Legend
Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this presentation is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.