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The Global Investor, our financial newsletter
  June 2002 - Issue 6 Previous Issues  

The Global Investor is a monthly newsletter that covers global investment opportunities and insurance for the expatriate community. This monthly newsletter's goal is to inform the reader of what can and cannot be done in the investment arena when living and working in a foreign country. Whether it's personal pension plans or disability insurance to protect your income - Global Investments has the expertise to handle all the expatriate investors' needs.


US PLANNING WITH INSURANCE PRODUCTS

Insurance products as efficient international tax planning devices have received a lot of attention in planning circles for the past few years and may offer a practical solution to many of the issues discussed above. For example, one way to trigger a taxable event (but no real US tax if prior to US residency) on an existing portfolio to achieve basis step up is to contribute the portfolio into an insurance or annuity contract. Furthermore, the future income and gains within these products accumulate free of US tax and holding structures can be devised to avoid the US gift and estate tax. It sounds great, but the US tax affection for complexity is exemplified in its approach to insurance.

In order to avail of these quite generous insurance tax exemptions (insurance really is one of the last truly "approved" US tax avoidance schemes) the contracts must be "US compliant". This requires, among other things, a fairly substantial and real death benefit payment over and above the underlying portfolio value; certain minimum diversification standards within the underlying portfolio; and true delegation of investment authority to an independent investment advisor. Although these rules can appear overwhelming to the uninitiated, a qualified international insurance tax professional can design and implement a tailored structure with extraordinary tax relief that even the US tax authorities must admit is genuinely effective.

The US insurance tax provisions permit the policy holder periodically to appoint and remove investment advisors (so they are not locked in with these guys forever) and also allows them to establish the broad investment parameters of the underlying portfolio (which can also be amended from time to time).


However, they will not be permitted to pick and choose the specific underlying investments within the contract. In effect, investment guidelines such as "large cap stocks" or "Leveraged commodity pools", etc. are permissible, but more specific instructions such as "buy 1,000 shares of IBM and sell the Microsoft" are not.

If the client has a favourite manager or diversified investment fund (such as a hedge fund) insurance may be the panacea for their US tax troubles.

Of course, this whole structure needs to be carefully coordinated between the insurance carrier, the selected investment manager, and the US and home country tax advisors.

Sounds simple - just drop all the investments in a US compliant insurance contract and the incoming resident's US tax worries are over? There are still a few other issues to consider. Such as, do they want to access these funds while a US resident, or are they willing to wait until they leave the US (either voluntarily or through death) to cash it all in? If it works just right, life insurance contracts should offer a permanent US tax exemption if the contract remains in force until the insured's death.

Furthermore, depending upon how the contract is initially funded, life policies may permit tax-free pre-death access to these funds while a US resident. In contrast, annuities (as compared to life policies) in general merely offer tax deferral rather than a permanent tax exemption. However, the annuity deferral may be all that's needed if the contract avoids tax while a US resident and then permits the investor to cash in tax-free once the US tax system is in their distant past.

Looking into the future towards an exit strategy demands that the new residents carefully consider which type of carrier issues their contract. The US imposes a withholding tax of 30 per cent (reduced under certain tax treaties) that may apply to the termination by a non-US resident (determined by residency on the date the contract is terminated) of annuity and life insurance contracts issued by US insurance companies.

Easy enough, they can buy their insurance from a non-US carrier, but the problem there is that (believe it or not) some offshore carriers have voluntarily elected to be treated as US carriers for tax purposes because it can give them certain advantages on US excise taxes and investment income. So the clients can buy their annuity or life contract from a non-electing carrier, but is its product then really "US-compliant"? If not, the contract is ignored for US tax purposes and the investor will be taxable as if they owned the underlying portfolio directly.

Advisors should also remind clients about that local insurance policy they bought 10 years ago to protect their family against lost earning and the potential estate tax in their home country in the event of their early demise. Once they move, that policy must be US compliant or any cash value built up from that point forward will be taxed by the US while a resident.

Add on top of these issues the questions of a possible OID (original issue discount) threat to non-US issued annuities and the fact that most transfers of annuities while a US resident trigger any previously deferred tax and it is enough to make anybody want to stay home.

But would-be US entrants shouldn't give up because once their advisors properly understand their current holdings and they consult their crystal ball concerning their intended length of US stay (e.g., temporarily or permanent), the chances are there is a tailored strategy that can weave these threads of wisdom into a beautiful tax-efficient suit that saves the newcomer a bundle. Again, think of the US tax code's complexity as a short-term nuisance but a long-term opportunity.

Page 1: OFFSHORE BANKING - THE MODERN WAY

Please contact Global Investments for more information
on Tel. (+66-2) 662-2009 or e-mail at info@globalinvestments.net.


 
 
 
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