Benefits of Insurance Structures for Offshore Investment
The advantages of private placement life insurance (PPLI) or variable unit-linked (VUL) life insurance are now well known and have become an integral part of wealth planning for offshore advisers. The main benefits are the following:
- Tax optimization and planning,
- Asset protection (ownership transfer of any premium)
- Investment flexibility, in particular for U.S. persons
- Estate, inheritance, and succession planning (tax- free death benefits and tax-free loans).
Insurance Industry Overview
Over the last few years, a niche model has emerged for U.S. persons and those with “U.S. connections”: the “953(d)” insurance company. Section 953(d) of the U.S. Internal Revenue Code (IRC) allows a non-U.S. insurance company to make the election to be treated as a U.S. taxpayer, which may provide material benefits to the insurance company, policyholders, and beneficiaries. With FATCA looming on the horizon, we think this model will become much more popular over the next few years. The 953(d) carrier should not be subject to FATCA because it is already a U.S. taxpayer and is compliant and transparent. It cannot be treated as an Foreign Financial Institution (FFI) because it is not foreign in terms of the IRC. Moreover, it would not imply an obligation to register with the SEC as an asset manager.
As an offshore insurance carrier, the 953(d) carrier can invest in assets located anywhere in the world, including the United States and Europe. Through the policy structure, the policyholder can legally defer income tax and capital gains tax and mitigate estate tax on the assets within the policy, regardless of the location of those assets: United States, Europe, Asia, and so on. Like a Liechtenstein or Luxemburg insurance company, the 953(d) carrier is not subject to U.S. state or federal insurance laws because it does not engage in trade and business in the United States.
The 953(d) election elegantly addresses a number of the issues with FATCA. As a U.S. taxpayer, the FATCA regime does not affect the 953(d) carrier. It is, in any case, tax transparent. This election results in a big benefit for non-U.S. persons with U.S.-situs assets and/or U.S. person dependents. The U.S. taxpayer status solves the withholding tax issues. The structure is fully tax transparent for U.S. beneficiaries but at the same time retains the tax advan- tages of PPLI. In particular, it provides benefits to those clients with U.S. beneficiaries in their trust structures. In combination with an irrevocable life insurance trust (ILIT), it also avoids the generation skipping tax (GST).
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