Elimination of Capital-Gains, Tax-Free Growth, Tax-Free Borrowing, Elimination of Estate Tax. This structure offers some of the best tax planning benefits available today. Investors with appreciated assets of at least $1 million (public or private stock, real estate, etc.) can use the FVUL structure to obtain significant tax savings. The FVUL can eliminate 3 levels of tax:
A. capital gains tax,
B. tax on reinvested income, and
C. estate tax.
(Investors without a highly appreciated asset who still want to take advantage of the benefits of creating their own life insurance policy can CLICK HERE to learn more about this separate strategy.)
Private Variable Annuity
The full FVUL structure contains several components. First, an investor transfers assets to an insurance company in exchange for a deferred private annuity.
The insurance company can be directed to either hold or sell such assets. For example, if an investor’s closely-held company stock is transferred to the insurance company, the insurance company can then be directed to sell the stock to a third party. The third party pays for the stock in cash, notes or other consideration. The insurance company invests the cash into stocks, bonds, mutual fund, etc., for the benefit of the investor. Foreign insurance companies are used, to provide almost unlimited flexibility in structuring the annuity contract. Investments can be held in either U.S. or foreign brokerage accounts, at the investor’s option.
No Tax on Sale or Growth
The sale of the assets from the insurance company to a third party does not trigger capital gains tax, because the sale is made by a foreign entity. Further, the investments accumulate on a tax-deferred basis until withdrawn.
Taxation of Withdrawals
The second component to the FVUL structure is combining the private annuity with a foreign variable life policy. The variable life policy allows the investor to take tax-free policy loans from the FVUL. If the private annuity were not combined with the FVUL, then the annuity payments would be partially taxable as ordinary income.
Long-Term Estate Planning
Combining the private annuity and foreign variable life insurance with a third component — a U.S. life insurance trust, allows the investor’s assets to pass to beneficiaires of the trust without tax. Upon the death of the investor, any assets inside the FVUL structure pass to surviving family members outside of the investor’s estate, thus avoiding the 55% estate tax. Therefore, this strategy can effectively “double” the after-tax value of an affluent investor’s estate.
The full FVUL structure is combining the private annuity, the foreign variable life insurance policy, and the life insurance trust, in a special way.
To ensure compliance with U.S. law, and to provide comfort to the investor, an independent legal opinion can be obtained.
Example
The power of the FVUL Structure is best demonstrated by an example:
Foreign Variable Universal Life Insurance – Example
Client has $2 million in appreciated stock or his business is worth $2 million and his tax basis is $10,000. Assume further he is 50 years of age, and he wants to start receiving annuity income at age 70. Now, let’s examine the client’s position under both “Standard Sale of Stock” and “Sale of Stock Using FVUL Structure” scenarios:
Standard Sale of Stock:
$2,000,000 less $10,000 adjusted basis = $1,990,000
Capital gains less 30% tax–federal and state (assume California rates of 10%)
= $1,393,000 after tax
12% yield less 30% tax = 8.4% after-tax yield
$1,393,000 at 8.4% for 20 years = $7,430,600
When he dies, after 55% estate tax, his children receive $3,343,800.
Sale of Stock Using FVUL Structure:
$2,000,000 less $10,000 basis = $1,990,000
Capital gain less 0% (offshore tax) = $2,000,000 after tax
12% yield less 0% portfolio interest or capital gains tax = 12% after-tax yield
$2,000,000 at 12% for 20 years = $21,785,000
When he dies, after 0% estate tax, his children receive $21,785,000.
Learn More About the FVUL
As you can see from the above example, the FVUL is a powerful strategy. If you have an asset (stock portfolio, real estate, private company, royalty stream, etc.) valued at $1 million or more, and desire some or all of the benefits available in the FVUL structure, we invite you to Contact Us for additional information.
Creating Your Own Life Insurance Policy
Now, we are going to change direction slightly, and talk about creating your own life policy — no special tax advantages here (other than generally found in life insurance: (a) tax-free growth, and (b) no income tax on the receipt of the death benefit). However, creating your own policy gives you flexibility regarding how the assets are invested, instead of leaving that decision up to the insurance company.
Life insurance comes in two basic varieties: term and cash-value insurance (which itself has various forms: whole life, universal life, variable life). Cash-value insurance is sometimes simply explained as “buy term, invest the difference.” While this explanation is too simple, it does assist the layperson in understanding what cash-value insurance is.
For example, if the monthly insurance premium of a variable life produce is $1,000, $150 of this amount might go to purchase “pure insurance,” while the remaining $850 would purchase bonds, stocks, mutual funds, etc. In this way, the life insurance policy has a “cash value” component that grows over time, as the assets inside the portfolio grow. For U.S. life insurance companies, the “$850” (in our example), can be invested only in some of the 10 – 20 mutual funds that are pre-selected by the insurance company — you have a very limited choice.
However, the benefit to foreign life insurance is that you direct the life insurance company which investments you want inside your policy.
The concept of “foreign variable universal life” can be effectively used even if the client does not own an appreciated assets. The benefit to foreign life insurance over domestic life insurance is one of flexibility: the client has a much larger role in picking the mutual funds and other investments that are part of the variable life contract. For example, if you really like the “ABC” mutual fund, you can purchase foreign variable life insurance, and direct the life insurance company to buy the ABC mutual fund. You simply do not have that type of flexibility with U.S. insurance companies.
A big second benefit, is that foreign life insurance can be obtained at less expensive M&E charges (mortality and expense charges), than a comparable U.S. policy.
Of course, there are various rules that must be followed to ensure that the foreign life contract is valid, among them are the cash-value corridor test, the guideline premium test, and the modified endowment contract test. Our insurance experts can help you to “build your own” insurance policy. The minimum monthly premium is $5,000, or quarterly minimum of $15,000, or yearly minimum premium of $50,000. Please Contact Us for more information.
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