Can using foreign structures reduce income and estate taxes?

Over a lifetime, clients could save millions of dollars in income and estate taxes.

Over a lifetime, clients could save millions of dollars in income and estate taxes by combining the asset protection of foreign trusts with the tax-favored status of life insurance contracts. Under the Internal Revenue Code, the cash value buildup of certain insurance contracts is not subject to current income taxation. That means that gains on investments held inside the insurance contract grow tax-deferred like gains in a pension plan or IRA. Unlike a pension or IRA, gains in an insurance contract come out in the form of withdrawals of basis or policy loans that are NOT taxed. When the insured dies, the outstanding loan balance reduces the death benefit of the policy, and when properly structured, the death proceeds are received income tax-free. That means clients have the choice of holding their existing investments on a taxable or non-taxable basis.

Can't I do that with a domestic insurance contract?

That gives your client complete investment flexibility, and allows you to manage their assets on a tax-advantaged basis.

You can get tax deferred growth and tax-free policy loans, but only on assets the insurance company allows to be held inside the policy. That means the insurance company selects your investments and investment manager. Some foreign insurance contracts allow your clients to put their existing investments into the policy as in-kind premium, and often have them managed by their current investment advisors. That gives your client complete investment flexibility, and allows you to manage their assets on a tax-advantaged basis.

Foreign insurance policies often accept as premium real estate, closely-held businesses, private securities such as surgery centers for physicians, LLC or LP interests, race horses, collectibles, or any other investment asset your client expects to appreciate in value, in addition to brokerage accounts, and tax-inefficient investments like hedge funds and private equity funds. Once owned by the insurance policy, the gains on those investments are not subject to income taxation, and if the policy is owned by a trust for your client's children or grandchildren, the gains may not be subject to estate taxation. They also may be able to take some or all of the rental income from real estate on a tax-advantaged basis.