The N eeds of W ealth Ow ning Fam ilies and the Tools that W ork Use of Insurance Products as Tax and Succession Planning Tools 18 November 2010 Stewart L. Kasner, Esq. (Miami) LawInContext Pte. Ltd. ( LawInContext ) was created by the global law firm Baker & McKenzie and provides cost-effective access to online legal information and training tailored to select communities of clients. LawInContext is neither a law firm nor authorized to practice law. No attorney-client relationship will be formed or deemed to be formed with Baker & McKenzie or contributing law firms through the use of LawInContext s legal information, knowledge management, and training services. This may, in some jurisdictions, qualify as "Attorney Advertising" on behalf of Baker & McKenzie or other contributing firms. A full disclaimer is available at http://www.lawincontext.com. Copyright 2002-2010, LawInContext Pte. Ltd. 2010 LawInContext Pte. Ltd. 1
W ebinar Overview An insight into the needs of wealth owners and/or their heirs and descendants resident in the United States The use of varying insurance products as a tax and succession planning tools Tax planning with trusts holding underlying insurance policies 2010 LawInContext Pte. Ltd. 2
I nsurance Strategies - General Overview Taxation & Succession Planning Income taxation Deferral (indefinite period) Differs between life and annuity policies Estate, gift & inheritance taxation Dependent upon policyholder domicile Income and inheritance tax free receipt of death benefit under life policies Asset protection if policyholder is also named as insured or annuitant (state law considerations) Consider policy insuring life of infant Use as lifetime tax free growth depository with expected withdrawal schedule (college, marriage, home, retirement) 2010 LawInContext Pte. Ltd. 3
Popular Products Variable Universal Life (VUL) Whole Life Insurance Term Life Insurance No cash value Deferred Variable Annuity (DVA) Income deferral No step up in basis on policyholder death 2010 LawInContext Pte. Ltd. 4
Concepts and Rules Investor Control Adequate Diversification MEC/Non-MEC Minimum Death Benefit (VUL) US Federal Excise Tax (FET) Foreign issued policies on lives of US persons 2010 LawInContext Pte. Ltd. 5
I nvestor Control ( I nvestm ent Manager Model) Owner selects broad investment strategies Investment Manager has absolute discretion Portfolio assets work best Closely held company shares not recommended 2010 LawInContext Pte. Ltd. 6
Adequate Diversification 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. * Use of fund of funds possible, but may not be entitled to look through 2010 LawInContext Pte. Ltd. 7
MEC/ Non- MEC Modified Endowment Contract (Life Policies) Seven pay test (actuarially determined) Typically fund over 4 to 7 years (non-mec), fully paid Withdrawals: income (MEC) vs. principal (non-mec) first 10% penalty tax on premature dist ns (MEC, prior to 59 ½ ) Loans treated as distributions (MEC) Death benefit increased initially if funding made in less than 7 years 2010 LawInContext Pte. Ltd. 8
Minim um Death Benefit ( VUL s) Cash Value Corridor Determined on basis of Insured s age and multiple of cash surrender value Surrender charges, policy loans, termination dividends excluded Age 40..250% Age 50..185% Age 60..130% Age 70..115% Age 90..105% Age 95..100% (consider 101% rider) 2010 LawInContext Pte. Ltd. 9
Federal Excise Tax ( FET) 1% FET on all premiums paid to foreign insurer Can be reduced or eliminated by Treaty When does it apply: DVA US-person annuitant (not owner) Life Insurance Payable by the policy holder US-person insured (not owner) Insurer can require proof of payment if not paid, Insurer can generally charge the segregated account backing the policy and remit to the IRS 2010 LawInContext Pte. Ltd. 10
Case Study Dan Carter is currently living outside the United States in country X working for an international bank. Dan is a national and resident of country X. Dan is married to Amelia with whom he has one adopted child. Dan and Amelia have no other children due to sterility issues and are unlikely to adopt any additional children. Dan owns an investm ent portfolio representing about USD1 0 million worth of equities and bonds. He currently has no other assets. Dan has just been told that he may need to relocate to the United States for an indefinite period to take over from someone who has recently left the bank. Dan has now approached you asking for advice regarding various structures that could be used to insulate him from taxation in respect of the earnings from his investment portfolio during the time that he is a resident of the United States. He specifically asks whether an insurance strategy will be helpful and is looking forward to your input. 2010 LawInContext Pte. Ltd. 11
Case Study In addition to tax minimization planning, Dan would like to understand if an insurance strategy will work as a succession planning technique with a view to having the death benefit under the insurance contract pass to his intended beneficiaries, i.e., family members and maybe friends. Here, the tax effect of having beneficiaries resident in the United States is of interest in terms of the tax treatment of death benefits or other policy payments. Dan is also keen on understanding whether the death benefit can pass to a trust designed for third-party independent management of the assets and distributions to the intended beneficiaries in view of their respective needs and to maintain their accustomed standard of living, as well as to provide protection from creditors. Finally, Dan is interested in understanding the tax and reporting requirements associated with any proposed structure and whether the tax effects change if the relevant trust is discretionary, fixed, revocable or irrevocable. 2010 LawInContext Pte. Ltd. 12
Case Study Please consider two scenarios: (1) Dan spends a period of several years in the United States and then returns to country X and no proceeds from the policy would be distributed to any individuals resident in the United States; or (2) Dan remains a resident of the United States and is interested to know whether he can access funds from the policy in a tax efficient way, either through borrowing on the security of the policy or through early redemption of the policy or otherwise. 2010 LawInContext Pte. Ltd. 13
DVA Strategy: I nbound Expat Intent to return to home country Inbound Expat Contribute passive assets Transfer portfolio in kind Irrev. adds level of US estate tax protection 684 tax on death in US or departure 679 grantor trust Asset protection Foreign Trust Irrevocable, disc. Beneficiaries incl. Spouse, Children, Expat If US issued, then withholding tax and penalty considerations on distributions or withdrawals of income If foreign issued, then FET considerations (avoid by issuance of policy prior to US residency starting date) DVA Expat, annuitant No death benefit or mortality costs Withdrawal/Loan options (likely taxable) No current income attribution to Expat grantor Income deferral to age 85 possible Segregated Acct Underlying Investments 10M passive asset portfolio Step up in basis upon contribution of assets as premium Pay premium prior to US residency starting date 2010 LawInContext Pte. Ltd. 14
VUL Strategy: I nbound Expat Intent to return to home country Inbound Expat Contribute passive assets Transfer portfolio in cash or in kind Irrev. adds level of US estate tax protection 684 tax on death in US or departure 679 grantor trust Asset protection Possible domestication if intent changes Foreign Trust Irrevocable, disc. Beneficiaries incl. Spouse, Children, Expat If US issued, then withholding tax considerations on distributions of income If foreign issued, then FET considerations upon each premium payment VUL Expat, insured Death benefit with added mortality costs Withdrawal/Loan options (possibly taxable) No current income attribution to Expat grantor Income deferral indefinite, permanent upon death Segregated Acct Underlying Investments 10M passive asset portfolio Step up in basis upon contribution of assets as premium Can pay premium in 4 to 5 annual installments Non-MEC treatment preferred for withdrawals and loans 2010 LawInContext Pte. Ltd. 15
Term Life Strategy: NRA w / US Assets NRA Husband Annual premium payments No Cash Value Low Mortality Costs Term of Years (i.e., 10, 15, 20) Convertible to VUL or whole life policy Transferable at little or no cost Term Life Policy NRA Wife, Children Beneficiaries Death benefit enough to cover US federal estate tax exposures (i.e., USRPI s) or provide liquidity. Death benefit exempt from US federal estate tax exposures if policy insures life of NRA owner. 2010 LawInContext Pte. Ltd. 16
Circular 2 3 0 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. 2010 LawInContext Pte. Ltd. 17
Questions? Contact: Stewart L. Kasner, Esq. Baker & McKenzie LLP 1111 Brickell Ave., Ste. 1700 Miami, Florida 33131 Phone 305.789.8940 stewart.kasner@bakermckenzie.com 2010 LawInContext Pte. Ltd. 18
w w w.law incontext.com info@law incontext.com LawInContext Pte. Ltd. ( LawInContext ) was created by the global law firm Baker & McKenzie and provides cost-effective access to online legal information and training tailored to select communities of clients. LawInContext is neither a law firm nor authorized to practice law. No attorney-client relationship will be formed or deemed to be formed with Baker & McKenzie or contributing law firms through the use of LawInContext s legal information, knowledge management, and training services. This may, in some jurisdictions, qualify as "Attorney Advertising" on behalf of Baker & McKenzie or other contributing firms. A full disclaimer is available at http://www.lawincontext.com. Copyright 2002-2010, LawInContext Pte. Ltd. 2010 LawInContext Pte. Ltd. 19