Using Foreign Insurance For Greater Asset Protection, Tax Savings, and Enhanced Investing
As asset protection planners, we don’t usually take a client’s wealth offshore without placing it in some type of insurance wrapper. An insurance wrapper is a term that refers to an insurance policy used as a vehicle or “wrapper” for other non-insurance purposes. In the offshore context, properly utilized insurance wrappers are very useful and have several benefits. First and foremost, foreign insurance wrappers give us a reason for why we take assets offshore. This is important because, in an asset protection context, it is always critical to have a reason for doing something other than just asset protection. The best plans have asset protection as an incidental benefit rather than a perceived primary objective. This is true even if asset protection is actually in fact the main reason for implementing the plan. This is due to certain nuances of fraudulent transfer law. Fore example, there have been court cases where a defendant stated that the primary purpose for their trust, LLC, or other structure was asset protection, and the courts ruled this ipso facto meant that any transfer into the structure was fraudulent.
Therefore, when a judge asks why you took $10 million offshore, the last reason you want to give is that you did it to thwart creditors. Foreign insurance policies are a good alternative reason for setting up an offshore entity because foreign insurers almost universally refuse to deal directly with a U.S. citizen. Instead one must set up an offshore structure and use it to buy the policy, which gives us a good non-asset protection “cover story” for why we set up an offshore trust, LLC, or other offshore entity. Putting cash in an offshore structure that then purchases foreign insurance also avails us the ?8(a) UFTA defense against fraudulent transfers - a very important defense if assets are taken offshore after creditor threats have already materialized. We discuss using foreign insurance wrappers to avoid fraudulent transfer rulings in this book’s chapter on fraudulent transfers as well as the chapter “Asset Protection a Judge Will Respect.”
If we take assets offshore to buy foreign insurance, the next question we must ask is why would we buy foreign insurance in the first place? Why not just stay domestic? The short answer is a foreign insurance policy is a gateway to access international investments. Many of these investments are not available to U.S. persons, because most foreign securities are not registered with the SEC, and most foreign broker-dealers do not want to risk becoming subject to U.S. regulations and taxes. If a foreign insurance company buys those investments within a policy that is owned by your offshore structure, however, then the foreign dealers will have zero exposure to U.S. regulations.
Using a foreign insurance wrapper for international investing often provides tax benefits as well. For example, if a U.S. person directly purchases foreign mutual funds, these funds will usually be taxed according to ?1291 of the Internal Revenue Code (IRC). Under IRC ?1291, the best case scenario is you’ll be taxed at the highest ordinary income tax rate. The worst case scenario, depending on how long you hold on to the security, is you may pay a tax as high as 84%! The good news is investing through an insurance policy will legally avoid the heavy ?1291 tax rates.
Furthermore, as with domestic insurance, offshore insurance may provide for tax-deferred or tax-free growth. For example, investments held in a foreign variable universal annuity (VUA) are tax-deferred until annuity payments are made (for individuals who want a guaranteed return, fixed rate foreign annuities are also available). Therefore, even if investments within the policy are sold, no tax is triggered if there is no annuity payout. Payouts or loans from foreign variable universal life policy (VUL) are tax free, and unlike with domestic VUL policies, annual returns of 10% are commonplace, and annual returns in excess of 20% are not unheard of. Many wealthy individuals use VULs for retirement income. If they borrow from the policy’s cash value (which grows according to the performance of invested premiums), the loan does not have to be repaid and is subject to very low interest (2% or so). If the loan is never repaid, the only consequence is a decreased death benefit. Using foreign VULs in this manner thus provides tax- free income in a heavily asset-protected foreign structure that is not subject to the ups and downs of a U.S. market or the progressively weakening dollar.
Foreign insurance policies typically have minimum funding requirements of at least a couple hundred thousand dollars, and are therefore more appropriate for the middle-upper class or high net worth individual. For those who are not able to make the minimum premium payment, there are other options. There are foreign stocks available through U.S. broker-dealers, although the selection is fairly limited relative to what’s available through a foreign insurance wrapper. Furthermore, foreign currencies may be bought and sold via a FOREX (foreign currency exchange) account, and one may of course purchase hard assets such as precious metals, real estate, and certain commodities that, unlike the U.S. dollar or domestic securities, are not at risk of being wiped out during an economic crisis.
