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?

Presenter

Presentation Notes

What are the tax benefits? Primarily an income tax planning vehicle Qualification for Tax Benefits – Core Elements “US Compliant” policies Diversification requirements Investor Control limitations Variables that improve specific case results MEC vs. Non-MEC Onshore vs. Offshore contracts Segregated account taxation State premium taxes vs. Federal excise tax (treaty reduction) DAC charges…only domestic and 953(d) carriers Holding structures make a huge difference Life Polices vs. Annuities Impact of reinsurance capacity limitations

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?

Presenter

Presentation Notes


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

$$


Income Tax Benefits

Access to Policy Values

Investable Access Consumable Access

Investable Access (Below the Policy) Selection of investment manager Investment guidelines Diversification Rules Investor control issues

Consumable Access


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


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

$$ $$


Trust, LLC or FLP

$$

Income Tax Benefits

Death Benefit as hedge against poor

investment performance PPLI Policy

$$ $$


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

Presenter

Presentation Notes

Gift and Estate Issues Pay Now or Pay Later. Exemptions. Repeal? Funding Alternatives Direct Transfers, Loans, Split $, Leveraged Transactions. Asset Protection. Who protected and for how much Segregated Account Statutes.

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?

Death Benefits

Annuity streams

Cash Value

What 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

Parents

Trust

Investments

$$$

Family Trust Planning

Kids

Parents

Trust

Investments

Family Trust Planning

Kids

$$$

IRS

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!!!

Parents

Trust

Investments

PPLI Combined with Trust

Kids

PPLI Contract

Above the Policy

Policy Contract





Presenter

Presentation Notes


PPLI

Presenter

Presentation Notes

Old Guard/Onshore Insurers v. New Age Offshore Market. OG: Incestuous relation with IRS. Always, make sure IRS approves product before issued to public. Therefore, very conservative…never press any legal issues beyond those acceptable to IRS. Heavily regulated and tax code includes these assumptions. OG practitioiners assume can’t do certain things on belief that such restricitons are based on tax limitations. In fact, these restrictions are non-tax regulatory restrictions and therefore when move offshore it is only the tax rules that continue to apply. However, the OG fails to recognize this dichotomy and continues complete deference to IRS. New Age: Driven by independent minded attorneys who owe no loyalty to the prior incestuos “peaceful coexistence” of OG with IRS. NA tends to make its own independent analysis of the law and then make a decision as to proper course of action. Under the NA thinking, the IRS opinion must be considered and given due respect…However, the NA is less likely to be as deferential to the IRS and is more willing to challenge the IRS where appropriate.

Trust Framework Settlor Trustee

Beneficiaries

contribution

benefits

Presenter

Presentation Notes

Trust is ultimate tax avoidance vehicle settlor divests himself of control - income accumulates ideally on a tax free basis in a no or low tax jurisdiction neither the trustee nor the settlor nor the beneficiaries 'own' the assets in the trust which, thus, cannot be used by the creditors of any of these.

Parallel Frameworks

Settlor Trustee

Policy Owner Insurer

Beneficiaries

contribution

benefits

X X

Presenter

Presentation Notes

The participants are similar to settlor, trustee and beneficiary

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





Presenter

Presentation Notes


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


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.


Above the Policy

Policy Contract





Presenter

Presentation Notes


Below the Policy

Investor Control Diversification requirements

Investment Management

Investor Control Doctrine

Who is treated as the owner of

the segregated account assets?

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

$$ $$


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

Fund

IDF Look Thru Rule

Owner

Diversified Portfolio

PPLI Policy

Fund

Owner


Single Investment??

PPLI Policy

IDF Look Thru Rule

Fund

Owner


Multiple Investments??

PPLI Policy

IDF Look Thru Rule

Owner


•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

Deferred Variable

Annuities

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

Presenter

Presentation Notes


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

Presenter

Presentation Notes


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


FLP

• Partners share in benefits • Tax-free accumulation • Tax-free lifetime access • Exit as tax-free death benefit • Hedge investment

performance

Life Insurance Policy


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

Trust

US Investor

$$ Potential Attribution of

PFIC Ownership

PFIC 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


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?)


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

mailto:[email protected]

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.

domestic & international planning with private placement life

Documents