Offshore Planning in a Transparent World
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Offshore Planning in a Transparent World

02/25/2013 | By: Kenneth Rubinstein, Esq.

Tax and Asset Protection Planning with Foreign Annuities and Life Insurance

Recent initiatives by the U.S. and other governments against confidential "tax haven" jurisdictions have resulted in a proliferation of new "exchange of tax information" treaties between the U.S. and most "tax haven" countries.

As a result, offshore tax planning strategies that depended upon the confidentiality of offshore jurisdictions for their success are no longer viable.

It is important to note that the loss of confidentiality with respect to tax information often results in a loss of confidentiality for all purposes. The disclosure of information about foreign assets on U.S. tax returns renders such information available to civil litigants and judgment creditors who have access to those tax returns via subpoena.

Thus, the net effect of U.S. anti-secrecy initiatives may well be not only the elimination of secrecy as the centerpiece of offshore tax planning strategy, but also its elimination as the primary aspect of offshore asset protection strategy.

Tax mitigation strategies must therefore be based upon a presumption of full IRS disclosure and, upon such disclosure, the ability to withstand IRS scrutiny.

Such strategies should, ideally, utilize existing statutes, regulations and court decisions to achieve their tax minimization goals.

Asset protection strategies should likewise be based upon a similar presumption of full adversary disclosure and, upon such disclosure, the ability to withstand judicial as well as adversarial attack.

Successful asset protection strategies should utilize existing statutes and court decisions — either U.S. or in the jurisdiction where assets will be located — to achieve their goals.

The emphasis is not upon hiding assets but upon protecting assets, using the law and geography to accomplish complete protection.

Presently, an offshore strategy is available that is both U.S. tax compliant and offers absolute asset protection. This strategy provides effective income tax minimization, estate tax reduction and asset protection through the use of foreign commercial deferred variable annuities and foreign variable universal life insurance issued by independent offshore corporations.

The plan presented herein is designed to limit income and estate taxes while protecting assets from attack by unsecured creditors.

The primary financial structure for offshore investment activities should be an independent foreign commercial annuity company that is engaged in the business of selling annuity policies to the general public. [Note: The U.S. taxpayer would have no affiliation with such company, either as shareholder, officer or director.]

The foreign annuity company, which is registered in a secure foreign jurisdiction in conformance with the laws of that jurisdiction, will protect the assets owned by that corporation and held in that jurisdiction from attack by United States or other creditors.

In addition, such foreign annuity corporation, having no registered U.S. shareholders, will be entirely exempt from tax on capital appreciation of U.S. investments and will also be exempt from tax on all non-U.S. income.

Complete asset protection is assured by the laws of the jurisdiction in which the annuity company is domiciled. Certain offshore jurisdictions do not recognize foreign judgments or subpoenas and contain very short statute of limitations periods for the commencement of actions in local courts based upon foreign claims.

Most important, such jurisdictions exempt insurance and annuity assets and proceeds from attachment in satisfaction of civil judgments. [Note: Similar exemptions for insurance and annuity assets and proceeds exist in many U.S. states.]

Such foreign jurisdictions also exempt the annuity company from virtually all local taxes.

The foreign annuity company would enter into an agreement to accept cash, securities or other assets from the taxpayer, in return for a deferred variable annuity. The agreement may provide for annuity payments to be made during the taxpayer's life.

The amount of such payments will depend on the earnings produced by the underlying annuity fund's investments. The exchange of U.S. assets for a commerical annuity is not a taxable transaction, nor is disclosure of this transaction required by the I.R.S.

Thus, the exchange of appreciated assets for a commerical annuity does not trigger a capital gains tax. The foreign annuity company would subsequently sell the assets and invest the proceeds. Because this sale results in investment income to the foreign annuity company, the sale proceeds are free of U.S. tax. Capital gains tax is entirely avoided.

In order to secure the safety of the assets, the annuity company would place the assets into a segregated account of an irrevocable offshore trust.

The Trustee of this Trust and custodian of the assets would be a well-credentialed international bank. Because this Trust is established by an independent foreign company, no U.S. tax disclosure is required.

The offshore Trust, which functions much like a domestic insurance trust, would then purchase a high cash value variable universal life insurance policy from a foreign insurance company.

The life insurance policy insures the taxpayer's life and pays death benefits to the Trust. The taxpayer's heirs may be the beneficiaries of the Trust and receive payment of such death benefits from the Trust, free of all taxes.

Since the life insurance policy is purchased from a foreign insurance company, the assets of the policy (cash value derived from premium payments and investments) may be held by the insurance company in a segregated asset account.

The assets in such an account would not be deemed the general assets of the insurance company and they would therefor be protected from claims by any creditors of the insurance company, in addition to being protected from claims by the taxpayer's creditors.

Such an account could be managed by an independent investment advisor chosen by the taxpayer. Income earned by this account would also be free of taxes.

The Trust would have the right to borrow the cash value of the insurance policy from the insurance company. The insurance company may also make tax-free loans to the taxpayer or to his/her family members.

This strategy results in the removal of significant assets from the taxpayer's estate and therefore, a significant reduction in estate taxes.

It also results in the elimination of capital gains tax on appreciated assets, as well as the mitigation of income tax on future investment income. Funds borrowed by the taxpayer from a foreign insurance company would be received by the taxpayer free of income tax.

Death benefits received by the taxpayer's family from the Trust would be free of income or estate tax. Minimal income taxes may be due in the United States on each annuity payment as it is received by the taxpayer.

Finally, this strategy will provide absolute asset protection on all assets held offshore. Most significantly, all of these goals are accomplished without dependence on secrecy or confidentiality and in full compliance with U.S. tax law.

Transparency is no longer relevant.