Disclosure: This material is for informational purposes only and is not meant to represent tax or legal advice. Each client situation is unique and may require further analysis and planning. The strategies outlined above may not be suitable for every client; individual tax and legal advisors should be consulted prior to implementation of any planning strategy. MHS 1099-2017.
Richard Hartmann, Auctoris Firm Principal, helped launch the 2017 Inaugural M Financial International Advisor’s Conference as the planning committee chair. The conference was held in Miami and was a huge success, bringing together over 200 professionals with the interest of assisting international clients in the areas of insurance, law, accounting, tax, consulting, etc.
In this blog Mr. Hartmann outlines situations where custom life insurance strategies for non-U.S. citizens can provide significant financial benefits.
While Auctoris places products for non-U.S. citizens with no ties or nexus to the United States (through Bermuda products), each of the items discussed and all of the case studies here assume the clients now have or, through planning, will have “nexus” to qualify for U.S. life insurance products. A nexus is defined as a non-resident alien or non U.S. citizen with a tie to the U.S. in the form of owning a company in the U.S., owning real estate in the U.S., having an investment account in the U.S., or having a trust in the U.S. The nexus is determined by the insurance carrier, rather than the government.
Before we learn how life insurance can help with planning for global citizens, it is first important to understand why U.S. Life Insurance is used and considered. Stability, experience and capacity are three top reasons. Other considerations are lower pricing, potential for enhanced cash value performance, and tax benefits. U.S. dollar denominated insurance has been very stable versus countries where rampant inflation could be a problem. Foreign products do not always assure people of currency stability. For example, a foreign $3M policy today could be worth only $300,000 at death. Additionally, the U.S. life insurance industry started over 250 years ago, and is known to be the most experienced and advanced in the world. Finally, the capacity of life insurance you can purchase in the U.S. is notable. Whereas the maximum capacity of life insurance on a person in most Latin American (LATAM) countries is $3-5M, using U.S. products $100M or more per life can sometimes be secured to assist in true wealth preservation.
The following outlines nine (9) situations where life insurance is ideal for Ultra-High Net Worth Families.
1. Individuals with Assets in the U.S. – Real Estate on Investment Account
Non-U.S. citizens having assets in the U.S. at their time of death are subject to a 40% tax before the assets can pass to their heirs. The first $60,000 is exempt from the tax.
Example: $2,060,000 home or condominium owned in Miami. At death, the estate tax is 40% of $2M or $800,000.
Insurance: An insurance policy on the owner’s life for $800,000 allows the estate tax to be paid by the insurance at 50-80% discount (the total premiums paid during lifetime should be between 20-50% of the insurance face amount) and the home or condo remains in the family.
2. Funding Taxes at Death in the Country of Residency
While most LATAM countries do not currently have a “death tax” more are considering it. This is the current death tax rate on the following countries:
Brazil: By state and up to 8% of the estate value & 15% income tax on gain on property
Dominican Republic: 27% on donations (gifts)
Guatemala: 6-25% depending on relationship
Uruguay: 3-4% depending on relationship
While the tax rate may be low for most countries, for the ultra-high-net-worth families the amount of tax is a significant amount to be demanded from the family’s liquid assets. For countries with a tax of 20-35%, not having life insurance to pay the tax will likely cause the family to sell most/all of their liquid assets and maybe a part of the family business.
In the U.S. most of the affluent use the leverage of life insurance to pay the taxes and fees due at death to preserve the family wealth. By using the leverage of life insurance, families can reduce the cost of paying the taxes due at death by 40-70%!
3. Recover Wealth Taxes paid During Lifetime
-Some countries impose a “wealth tax” on higher net worth families
-That is a direct hit against the family’s goal of wealth preservation
-These families look to life insurance as a tool to allow the family to recover (tax free) all of the wealth taxes paid during their lifetime
-It is a tax-free wealth preservation strategy, yet very simple
4. Guaranteed Income for Spouse & Children
Some patriarchs and matriarchs want to protect their spouse with a definite amount of liquid, stable currency in the event of their death. U.S. life insurance is an ideal strategy. The cost to acquire it may be 0.05-1.5% per year of the amount of insurance they want to provide the guaranteed fund.
Example: $20M of insurance invested at 5% would provide the spouse and/or family $1M of income per year.
There is no other financial instrument in the world that provides a stated amount of money (death benefit) at an unknown time in the future – the death of the insured.
5. Multi-Generation Wealth Transfer
There are three (3) significant challenges to wealth that make perpetuation of lifestyles difficult:
-Taxation (wealth tax, death tax).
-Division among next generation. Father and mother divide wealth among 3 children, who divide among 9 grandchildren, who divide it among 27 great grandchildren…
-Life insurance is used by ultra-high-net-worth families to create new tax-free capital every generation to counter the impact of inflation, taxation, and division so family lifestyle and family wealth can be perpetuated.
6. To Replace Less Efficient Existing Life Insurance
-Clients in LATAM may have less efficient and more costly insurance in their portfolio whether the policies are issued in their country or if they have other U.S. or global policies, perhaps from Bermuda.
-The new generation of products in the U.S. attempt to surpass all of the above, especially if our exclusive M Financial products are utilized. The products provided exclusively for M Financial clients are priced on 1) the better mortality table for high net worth Americans, 2) the lower unit cost because our policies are much larger than average, and 3) the fact that policies are kept inforce longer (lower lapse rate).
-Reviewing and comparing existing life insurance to what is available today is a very common practice that yields significant savings to people who are still insurable today, even if they are older (e.g. Age 70-85).
7. Income Tax Planning
Individuals who have significant investment income in their country or anywhere else use life insurance for income tax planning.
- They reallocate some of their invested money to life insurance policies. The cash value grows tax free in every country.
- The person can withdraw money tax-free during their lifetime, perhaps as a retirement income supplement or to provide children, in their later life, annual tax free income.
- If a person is invested in hedge funds or other investment alternatives that produce ordinary income every year, he/she should consider a Private Placement Life Insurance (PPLI) product. Alternative investments are purchased inside the life insurance policy so all income is tax free and withdrawals can be made tax free, as the basic policy is kept inforce until death.
8. Estate Equalization
If one or more children are not interested in a family business, the question frequently asked is, “how can they be equitably provided for?” Life insurance creates cash tax-free at death when the business generally passes to the heirs. Those not interested in owning a piece of the business could have tax free proceeds of insurance on father/mother for their share.
9. Business Succession Planning
If two or more individuals own a successful business, how would the survivors buy out the family of a deceased owner?
Life insurance on each of the owners is the most economically efficient method.
Life insurance is so much more than just a product. Used as discussed in this blog it becomes a planning strategy for ultra-high-net-worth clients and advisors not previously aware of the power of U.S. life insurance because of capacity available, stability, lower pricing, potential for enhanced cash value performance, and tax benefits.
Generally all ultra-high-net-worth families have an ideal place or need for quality life insurance
If you think you have a situation where life insurance could be appropriate to consider, please contact us.
Auctoris is a Member Firm of M Financial Group. Securities and Investment Advisory Services offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Advisor. Member FINRA/SIPC. Benefit Concepts, Inc. DBA AUCTORIS is independently owned and operated.