Private Placement Life Insurance A practical look

Transcription

1 Private Placement Life Insurance A practical look February 2012 Martin Straub Envisage Envisage Wealth Management Binzstrasse Zürich Tel Fax martin.straub@envisage.ch

2 The benefits of Private Placement Life Insurance Investment Flexibility Asset Protection Tax Optimisation Estate Planning Effective, efficient wealth planning tool Combines the most sought after objectives in wealth management in one structure; Tax savings Asset protection Investment flexibility Estate and succession planning 2

3 Benefits and advantagesof Life Insurance Tax Planning and Optimization: Usually, a life insurance policy enjoys full tax deferral during buildup No tax on income or capital gains on the portfolio during the accumulation period Asset protection: Legal title (ownership) of assets passes from policyholder to insurance company Assets underlying policy cannot be attached or accessed by a creditor or other claimant in a legal process. Inheritance and succession planning: Effective, low-cost, tax-efficient transfer of wealth from older generation to younger Possible to bypass forced heirship laws - remove assets from policyholder s estate Legal disputes rare very difficult to attack a Swiss life insurance policy Investment tool and control: Flexible choice of investments, virtually any bankable asset can be wrapped The policyholder selects investment strategy managed by asset manager with discretionary mandate 3

4 Tax planning and optimisation Income Tax Wealth Tax EstateTax Assets Assets Assets No income tax Income; dividends, interest, etc. Tax-free accumulation within the policy No wealth tax Tax-free accumulation within the policy Inheritance $$$ No inheritance/estate tax on payout of policy assets Beneficiaries Account / Assets segregated from policyholder No ownership No Taxes 4

5 Inheritance and succession planning - as an planning tool Inheritance $$$ Trust Assets No or reduced estate/inheritance tax on payout of policy assets No probate Usually no income tax Can reduce or eliminate inheritance taxes Depending on country For the US - can eliminate estate taxes and avoid probate Saves costs Efficient and effective Private and discrete Can avoid forced heirship problems Saves those left behind time, expense and public procedure Tax free payout of death benefit possible Beneficiaries 5

6 Investment flexibility examples wide range of assets possible Bank Account Private Equity ETFs Hedge Funds Captive Insurance Company Passive Foreign Investment Companies (PFICs) (Also solves the PFIC tax problem for US persons) Trust owned life insurance (TOLI) Trust Trust Trust is beneficiary of the policy Trust settled by life insurance at death of policyholder Cash Shares Real Estate Closely Held Companies Equities, Bonds, Hedge Funds $$$ Trust $$$ Beneficiaries 6

7 Strong Asset Protection - segregation of policy assets. Asset Protection Between Policies and the Insurer Between Policies and holder / Beneficiaries holder Assets Insurance Company Assets Beneficiaries Accounts are separate from accounts of Insurer Each policy has its own account Insurers creditors have NO claim on policy assets Legislation preventing Insurers from paying creditors of either holder or Beneficiaries any policy assets Creditors have NO claim on policy assets Very strong asset protection 7

8 The set-up and participants holder (Bob) Mediates Owns Relationship Trust Company/ Lawyer/ Other Intermediary Asset Management Agreement Asset Manager Envisage Wealth Management Manages Assets xxxx xxxx Insurance Carrier Insurance - Contract - Custodian Bank Account and depot account maintenance Insurance A/C: 1440/1 8

9 Difference between and a Wrapper Compliant Bobs Account Private Placement Life Insurance Designed to be compliant with all laws in Bobs home jurisdicion Tax compliant Meets criteria for life insurance Effective wealth planning tool Insurance Bobs Account Wrapper NOT designed to be compliant with all laws in Bobs home jurisdicion Not necessarily Tax compliant May not meet criteria for life insurance Potential wealth planning time bomb 9

10 FINMA - the two circulars. Recent regulatory guidance? Circular 1 Newsletter 9 27 April 2010 First pass at addressing the issues FINMA tries to apply guidance A certain amount of confusion generated Imperfect understanding of insurance industry Circular 2 Newsletter December 2010 FINMA learns fast Considerable, impressive improvement Requirement to identify Beneficial Owner clearly requested -- ie., the policyholder Bank and insurance carrier responsibilties more clearly defined 10

11 What is the regulatory problem?? Local Regulators Parent companies regulated in Switzerland But Companies actually issuing the policies are subsidiaries in Liechtenstein, Luxembourg, Singapore, etc. May be technically or branded Swiss, but legally are out of FINMA jurisdiction Swiss Based Insurance Companies Liechtenstein Luxembourg Singapore Subsidiaries So what? FINMA cannot regulate them directly! But - Exposure (ultimately) in Switzerland However - Business activities in foreign countries - cross border business This means Subsidiaries rewarded for taking risk Not penalised for doing so Some wierd insurance structures were set up for clients 11

12 Industry issues: a couple of examples Bobs Account Inappropriate, non-compliant, poorly set up structures High, intransparent cost structures Investment (mis)management issues Fiduciary duty issues Bobs Account??? Compliant Bobs Account??? Beneficiaries??? Origin of funds? Where did the money originally come from? Was it declared to tax authorities? Amnesty? Statute of Limitations?? Does it matter??? Compliant policy, but... holders situation has changed; more beneficiaries, divorced, disabled, changed his mind Insured person dies, policy has continued to run Beneficiaries can t be found, gone missing, tax issues, laws have changed, etc., etc., 12

13 BIG ISSUE: Fiduciary Duty Example: disclosed & undisclosed payments to Asset Manager over 5 years on a 1 Mio. policy Payments to and from Asset Manager Worst Case Best Case Median Asset management fee 7.50% 2.50% 5.00% Retrocession on Depot fee 0.45% 0.00% 0.25% Retrocession on Transaction fee to set up 0.68% 0.00% 0.36% Retrocession on Transaction fees 1.13% 0.00% 0.30% Retrocession on FX Agio 0.08% 0.00% 0.02% Retrocession on invest. fund up-front load 6.40% 0.00% 1.00% Distribution fee from fund prod. 3.60% 0.00% 1.32% less kickback to Broker -2.50% 0.00% -1.25% 17.33% 2.50% 7.00% Payments to and from Asset Manager Asset management fee 75'000 25'000 50'000 Retrocession on Depot fee 4' '500 Retrocession on Transaction fee to set up 6' '600 Retrocession on Transaction fees 11' '000 Retrocession on FX Agio Retrocession on invest. fund up-front load 64' '000 Distribution fee from fund prod. 36' '200 less kickback to Broker - 25' ' '250 25'000 69'950 13

14 The effect on return over 20 years. Not subtle. Value 3'500'000 3'000'000 6% control - raw return 2'500'000 Best Case - Insurance 2'000'000 Median Case - Insurance 1'500'000 1'000'000 Worst Case - Insurance 500' Years Control: 6% compound return Insurance - Worst Case Insurance - Best Case Insurance - Median Case Control: 6% compound return Insurance - Worst Case Insurance - Best Case Insurance - Median Case Total Return 221% 9% 148% 84% Loss to fees and charges 0% 96% 33% 62% 14

15 Need to resolve the fiduciary duty issue. New role for professional trustees or audit companies. Contract xxxx xxxx Monitoring & Evaluation Trust or Audit Company Fiduciary duty and responsibilties Oversight of asset manager Due care and diligence Ongoing monitoring & evaluation of investments, objectives vs. strategies Reporting, tax, compliance New xxxx xxxx holder Insurance Carrier Contract xxxx xxxx Asset Manager Asset Management Custodian Bank Assets: Bankable Assets Real Estate Company participations etc 15

16 Working with US persons Every family (and every advisor) has one, or two, or three Asset Manager wanting to work with US persons Needs to register with the IRS, the Treasury, the SEC, whoever... Various disclosure requirements Contamination risk Not an attractive proposition in the current environment SEC Registration duty Criteria for registration > 15 US clients > USD 25 Mio. AUM ADV parts I and II SEC examine application Subject to regulatory examination Washington becomes legal jurisdiction Compliance obligations Full information exchange with IRS Record keeping duties Audit and other examinations 16

17 Who is a US Person? It all depends... There are two definitions for US person US person according to the IRS US person according to the SEC They are different Have different implications for clients, insurance company and asset manager US person according to the IRS US citizen Green card holder Substantial presence in US US person according to the SEC Person permanently residing in US US corporation Other 17

18 For insurance solutions & US persons; the 953(d) insurance carrier US person/company in: America Offshore¹ To the IRS US person US person To the SEC US person US person X ¹ eg., Bahamas, Bermuda, Cayman islands 953(d) carrier Submits W9 to custodian bank 953(d) carrier Located offshore Non-resident US person for the IRS Full compliance and information exchange No QI issues for the custodian bank NOT US person for the SEC No SEC registration requirement for the asset manager 18

19 What does the Client need and Advisor want? An integrated solution. xxxx xxxx Insurance Company W9 form to the bank holder Bob Not US person to SEC Is US person to the IRS - W9 taxpayer Custodian Bank No QI problem No withholding tax problem No FATCA problem Asset Manager Envisage Wealth Management Services Asset manager has one US person as client No IRS problem No SEC problem Bobs Account W9 - submitted by 953(d) carrier Compliant - IRS and SEC All insurance benefits External Auditor/ Trust Company Check on Asset Manager Audit:, Strategy, Asset Allocation Fiduciary duty issue addressed 19

20 What can be done with Trusts and Companies Trustee Family Members Trusted Advisor Professionals Private trust company Trust Protectors BVI Holding Co. 1 Nevis Holding Co. 2 Panama Holding Co. 3 Shareholders Agreements Share Classes Professional directors etc. Assets Assets Assets Beneficiaries Segregation per asset Segregation per family branch 20

21 can often be done with insurance Trustee Family Members Trusted Advisor Professionals Private trust company Trust Protectors Insurance 1 Insurance 2 Insurance 3 Contract holder, Insured Person Insurance Company Assets Assets Assets Beneficiaries Segregation per asset Segregation per family branch 21

22 To summarise Private Placement Life Insurance, Bancassurance, etc is: Wealth planning tool - compliant with all tax & other applicable laws Now reaching maturity as a wealth planning tool Compliance is key to long run viability New, attractive opportunities for professional trustees Alternative and complement to Stiftungen, Anstalte, Companies, Trusts Setting up structures Fiduciary duty Administration and oversight 22

23 Disclaimer This presentation contains information prepared by Envisage GmbH ("Envisage") and is not a direct solicitation by Envisage in any way, form or manner. This information may not be copied, altered, offered, sold or otherwise distributed to any other person by any recipient without the prior written consent of Envisage. Although all reasonable effort has been made to ensure facts and estimates stated within this presentation are accurate and opinions contained are fair and reasonable, this information is of necessity brief and selective in nature. The material is intended to provide an introduction only. None of the information contained in this presentation constitutes or is intended to constitute legal, financial, investment, tax, accounting or any other advice. Neither Envisage nor any of its directors or employees and advisors, nor any other person shall have any liability for its accuracy, inaccuracy or liability, loss, damage or harm, however arising, directly or indirectly from the use of information contained within this presentation. Envisage does not recommend or guarantee that information contained within this presentation should be used as a guideline, template or to replace independent investment, legal, tax, accounting, financial or any other professional advice. Furthermore, no comments contained in this presentation are intended to be used for or as investment, tax or legal advice, for the purpose of avoiding any penalties imposed under any countries tax or legal code. 23