21 OFFSHORE ESTATE PLANNING OFFSHORE VARIABLE ANNUITIES

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The threatening posture and complex nature of U.S. laws and

the far-reaching attempts of the U.S. government to control U.S.

taxpayers, and inf luence foreign governments, f inancial institutions,

and others to cooperate with their whims has left many

offshore services and professionals hesitating to conduct business

with U.S. taxpayers. This problem, coupled with regulations

forbidding U.S. taxpayers from doing certain things offshore,

including where they are not allowed to invest, has effectively

shut U.S. investors off from many of the best foreign investment

opportunities.

To avail themselves of these forbidden opportunities, many

well-off U.S. investors are purchasing offshore variable insurance

annuities from offshore insurance companies that are not restricted

by U.S. laws. This is perfectly legal. Not only can investors

thus diversify their foreign investments, but they are also actively

engaging asset protection and accumulating faster and greater

wealth. Since this is not a life insurance policy, there is no requirement

for a medical exam. The biggest drawback is the entrance

fee, which can begin at $250,000. But, for many Americans, that

is within reach. If you wish, you can borrow against the annuity

immediately, and if this occurs before any accumulation occurs,

there is no tax on the distribution of money. Otherwise it would

be taxable.

The offshore variable annuity can act as a savings or a retirement

plan, but in actuality it is a contract with an insurance company, and

you get to choose where the money will be invested. The annuity is

acquired with a single payment, but as the underlying investments

appreciate, the money compounds, tax-deferred. You decide when to

withdraw money and only then are you taxed on it as ordinary income.

There is no limit to how much you can withdraw. However, if

you leave it to accumulate tax-free, you are getting the added benefits

of a large sum compounding, thereby earning you more the

longer you don’t touch it, or until the annuity matures. If it matures

at some given age, then it would either be surrendered or converted

to a life annuity.

Most investors are attracted to this type of annuity to defer taxes

on their investments and for asset protection. They also can get

money when they need it. Many offshore jurisdictions specializing in

the offshore insurance industry have laws that protect annuities

from foreign creditors or from foreign estate proceedings. Even if

the insurance company has problems (and this is not likely if you

pick the right one from the start), the individual policies are held as

separate assets, not as part of the insurance company, and therefore

are not subject to their creditor claims. Switzerland, for one, has a

strong insurance industry and no companies have failed. In some

cases, annuities cannot be included in a bankruptcy procedure. If

you die, the cash value of the annuity is paid to the designated beneficiaries.

Of course, the accumulated deferred tax and any estate

taxes will be due.

There are other possibilities for structuring the offshore variable

annuity, including having a trust take out the annuity, and

at the time of your death, its value will be excluded from your

estate. Consult with your tax advisor or insurance specialist, and

as always, stay with a reputable insurance company in a good

offshore jurisdiction, have a professional review, and translate the

policy so you understand what you are committing to. Insurance

policies are generally nonreporting. Expect to invest a minimum

of $50,000.

Part Three: “Today’s Tax Havens” reviews the unique characteristics

and areas of specialization of the different countries, including

local contacts. Reputable advisors who can assist with offshore variable

annuities can be found in Part Four: “Financial and Investment

Service Contacts.”

TRUSTS, ASSET PROTECTION TRUSTS, CHARITABLE

TRUSTS, THE LIECHTENSTEIN FOUNDATION, AND

THE ANGLO-SAXON FOUNDATION

Trusts are formed under English common law in countries such as

England, the United States, Canada, and a few others where the concept

of equity is understood. Otherwise, trusts are formed under

civil legal systems of countries such as Panama, Liechtenstein, and

France, and thus are based on a code of express provisions. Most European

and Latin American countries are civil law countries. Also, a

few civil law countries have adopted legislation recognizing the

common law trust.

In the United States, parties to a trust and the underlying assets

being held for the beneficiary are all subject to the whims of the

Americans, a litigious bunch of people who sometimes act as if winning

a lawsuit is the same as winning the state lottery. This prevailing

attitude spills over into the legal system, including the lawyers,

who often fuel the fire. With this backdrop, clever foreign jurisdictions,

often English common law based countries, have drafted

their own legislation to better clarify their position on trusts and

the special advantages that they offer foreigners, like those savvy

Americans who need protection from their litigious fellow citizens.

In response to this hostile environment and the potential to attract

business to their offshore jurisdiction, the foreign asset protection

trust was born.

The asset protection trust (APT) is the favored offshore trust designed

to substantially reduce the rights of creditors by placing the

situs of the trust in a foreign land. If set up properly, it affords maximum

protection and preservation of assets, but it must be irrevocable

to be considered a separate entity from the trustor. This means that

you cannot have control of the trust.

Trust laws are well developed in many offshore jurisdictions including

Nevis, Belize, and the Cook Islands, the three strongest APT

jurisdictions. Among the trustees of the APT, there will need to be at

least one foreign trustee, usually a local professional, and, in case of

an attack on the trust by a U.S. court, all U.S. trustees would immediately

resign, leaving only the foreign trustee, whom the United States

would have no jurisdiction over. This would leave the attacker the option

of an action de novo in the courts of the offshore jurisdiction,

which, once creditors learn the potential difficulty and expense, they

92 BUILDING A SOLID OFFSHORE FINANCIAL FORTRESS

are unlikely to pursue. Creditors must prove their claim beyond a reasonable

doubt and the statute of limitations on such claims in the offshore

jurisdiction is likely to be short.

Assets are generally secure in the hands of a foreign trustee who is

a professional, but as an added precaution, a protector can be inserted

into the trust by the trustor—a person or committee—to keep

tabs on the trustee for the sake of the beneficiaries. An important

issue is whether the trustor or grantor (the creator of the trust) had

the capacity to establish the trust and subsequently transfer assets to

it. Therefore, besides selecting an offshore haven with strong trust

laws, also be certain that there are clear laws on capacity.

The APT can have f lexible trust provisions for the trustor, such

as to add or remove a beneficiary, to change the share of beneficiaries

on occasion, and to change the trustee powers. Investment advisors

and custodians can be appointed to assist the trustee as needed.

The trustor can draft a letter of wishes for the trustee to follow as a

guideline, but the trustee is not legally bound to do so, particularly

if the trustor’s wishes do not correspond with the purpose of the

trust. The time to establish the APT is before creditor problems or

lawsuits arise. If these pop up after the trust is set up, the trust assets

will be completely protected. Otherwise, a transfer of assets under

such conditions could be fraudulent. The APT is tax-neutral and not

established to save on taxes. For tax purposes, it is considered a

grantor trust, not a foreign trust. This is an ideal device for U.S. professionals

to protect assets against malpractice suits. There are numerous

advantages to the foreign asset protection trust and a local

professional or qualified estate planner can answer any questions

you may have. The cost will likely be more than the cost to establish

a trust in the United States.

A charitable trust can be employed for personal tax planning by a

well-heeled person for perfectly charitable reasons. Foreign charitable

entities include foundations, trusts, and certain types of companies,

but these are complicated for U.S. citizens to use, and the

benefits may run out quicker than hoped, requiring further tax

planning alternatives. A few charitable vehicles worth looking into

are the Austrian private foundation known as the “Privatstiftung,”

the Bermuda international charitable trust, the Cayman Island Special

Alternative Regime, the Gibraltar company limited by guarantee,

the Isle of Man hybrid company, possibly the Gibraltar hybrid

company limited by guarantee, the Liechtenstein foundation known

as the Stiftungen, the Panama foundation, and the Swiss tax-exempt

foundation.

Foundations are generally organized in civil law countries as legal entities

created under statutes and basically they serve the same purpose

as the trusts found in common law countries. Foundations are established

by a founder for wealth management either for the beneficiary or

for a specified purpose. There are no shareholders. Administration is by

a corporation or individual members.

This applies to Liechtenstein and Panama, where you will find favorable

civil law foundations.

The Liechtenstein Foundation, or Stiftungen, is not taxed by Liechtenstein

if it qualifies as an offshore corporation, and any beneficiaries

who are outside the country and receiving monies from the

foundation are also not subject to tax. The founder may be a corporation

or an individual of any nationality and may reside anywhere in

the world. The Liechtenstein foundation is a cross between a corporation

and a trust, similar in that way to the Anstalt described previously.

A certified foundation deed must be filed with the Public

Register; however, no information is available to the public.

From a tax perspective, it might be advisable for U.S. citizens to

avoid using a foundation in a civil law country as the Internal Revenue

Service may categorize it as a trust or alter ego of the founder’s right.

That is to say, they might perceive that the founder, maybe a local

lawyer, has established the foundation on behalf of an offshore investor

that the IRS has a particular interest in, causing them to look

closely. This could also possibly apply to the Liechtenstein Anstalt. In

both cases, there are no associates, which the IRS requires to clearly

define such an entity for tax purposes as a corporation; otherwise, it

may be that it will be taxed as a trust. A Liechtenstein domiciliary or

holding company might work better. Part Three provides more information

on the Liechtenstein and Panama types of legal entity for international

use.

Either of these entities, if for the benefit of a nonresident alien,

should avoid investment in real estate, securities, or other assets

within the United States, so as not to be taxed on its income and also

to avoid the Anstalt or foundation from being taxed on its U.S. assets

at the time of the nonresident alien’s death.

The Anglo-Saxon foundation is the English common law answer to

the Liechtenstein foundation. A guarantee company would be organized

by the founder in an attractive offshore jurisdiction, and it would

be structured in a way to mimic a Liechtenstein foundation, although

it will be a more sophisticated and f lexible version. Once established,

the founder appoints two classes of directors, the founder directors,

constituting the founder and his family who have control of the financial

benefits of the foundation, and the general directors who would

be professional advisors to run the daily affairs. The founding directors

can elect new members, such as themselves, who are the recipients

of the benefits of this structure. As for the general directors, they

are paid for their services and have no control over the founding directors,

who may be elected, or what benefits the members are to receive.

The Anglo-Saxon foundation would be treated as a corporation

for tax purposes.

OFFSHORE LIFE INSURANCE

Beneficiaries of an offshore life insurance policy are not taxed on

receipt of the death benefit when the policyholder dies, avoiding estate

taxes and taxes known as “generation-skipping” taxes. With income

taxes and estate taxes gobbling up as much as 50 percent and

more of the value of an estate, offshore life insurance looks very attractive.

It is also possible to borrow nearly the full value of the policy

with no requirement to service the loan. Policy loans are tax free.

Good asset protection is afforded in jurisdictions that legislate protection

of the death benefit and underlying investments, making it

more challenging to contest the estate. In a tax haven with secrecy or

strong confidentiality laws, privacy is maximized. Formerly blackedout

foreign investment opportunities are available, and the asset

manager you appoint can make any type of investment at your discretion.

Purchase of an offshore life insurance policy is nonreportable,

and the tax-free income and profits it earns are also

nonreportable.

The best type of offshore life insurance policy is known as

a Private Placement Variable Universal Life Insurance (PPVUL).

This policy can be held by a foreign trust, and at the time of

the grantor’s death, the beneficiaries could effectively avoid estate

tax. You would want to consult with a reliable advisor. Although

not expensive to establish and administer annually, it would

require a signif icant estate of at least $500,000 to be worth

pursuing.

THE OFFSHORE WILL

A will is to an investor what a safety net is to a high-wire circus performer.

If he should fall, the safety net is in place to catch him. It

would be of little use to construct the net after he is falling. The same

goes for your will. Fate does not give advance notice.

Most likely, you do not want to leave your estate, no matter how

large or how small, to the state. Even if you don’t have or don’t wish to

allow family members to benefit from your hard efforts and financial

accomplishments, there is always someone or a charitable cause that

would be worthy of a financial infusion.

To die without a will is to die intestate, and it is a sure way to help

the government coffers. If nothing else, someone is going to have to

attend to the details of your death, including costs related to burial.

We all want someone to see to those details, so it is best to decide in

advance who that is likely to be. If no one else is on your list as a beneficiary,

this person might be a likely choice for that privilege.

Offshore assets will complicate the settlement of your estate if not

planned for in advance. Your beneficiaries may suffer longer delays

and greater expense in settling the estate. If the bulk of your estate is

held in offshore assets, you should consider having a will that covers

them, and possibly a foreign trust, too, like an asset protection trust.

In fact, you could have one trust for covering U.S. holdings and another

for foreign assets. What doesn’t get covered by the trust(s) will

be covered by the will.

The cleanest and most common method for holding foreign assets

is to place them in an offshore corporation and then have the shares

of the corporation be owned by the trust. That way you can have good

control over the assets and manage them better.

It is wise to have a reputable foreign attorney who is versed in estate

planning review the status of your estate as early as possible. Besides

getting it in order, you may discover, as presented in this book,

the many financial benefits you could be gaining while alive, including

tax-deferred and tax-free earnings, asset protection, and diversified

investment strategies that can increase your wealth.

With foreign assets comes the need for the executor of the estate

to appoint legal representatives in each country where they

are located. This effort can be coordinated on behalf of the executor

by your offshore attorney, making the task much easier. You will

also have a greater level of privacy by having your personal affairs

attended to offshore because the foreign attorney, even though

bound by attorney-client privilege, is not licensed in the United

States or whatever your country of origin may be, and thus is not directly

subject to the laws of your government.

It is fairly easy not to leave your estate intestate as Howard Hughes

did, which is pretty amazing, since he managed to build an empire.