Tax Overview

Offshore Asset Protection Trusts (OAPT) and International Business Corporations (IBC) are Tax Neutral

Offshore Private Placement Life Insurance (PPLI) is Tax Advantageous

Offshore Private Placement Life Insurance (PPLI)

For PPLI the policyholder is not interested in insurance. He is interested in investments. Therefore he purchases the smallest amount of insurance which will “wrap around” his investments and provide them the tax benefits sought.

• No Income Tax on policy investments.
• Policy Income not subject to capital gains tax.
• Policy Proceeds are not subject to estate tax.
• Policy Cash Value (where your investments are held) Is 100% Asset Protected

PPLI policies offer the same tax benefits whether the insurance company is domestic or internationally provided they are both structured as U.S. Tax compliant. 

International Tax Compliance
PPLI is a tax strategy that transforms taxable ordinary income and capital gains into tax-free income (with no income tax reporting required under current U.S. Law). Please reference IRS Private Letter Ruling 200244001 (May 2, 2002).

For U.S. Persons with investment income, private placement life insurance provides for compliant, tax-free compounded earnings.

From Wall Street Journal 10/18/06 article, Insuring Against Hedge-Fund Taxes:
It’s called “private placement” life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes — as is the payout upon death. What’s more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy, depending on how it’s set up…

Private-placement policies are typically restricted to individuals paying at least $1 million in total premiums. ... A private placement insurance policy is variable in nature, which allows the insurance company to invest the majority of the premium(s) in a legally separate, segregated account to be managed by either an investment manager of the client’s choosing or the insurance company itself... .

The income tax benefits are:
1) Assets inside a life insurance policy grow and compound income tax free.
2) Death benefit paid income tax free.

... [I]nternational private placement life insurance policies allow users to invest in a wider range of investments including hedge funds, private equity, derivatives, and real estate investment trusts (there are functionally no restrictions on the types of investments that can be held and managed inside the policy).

Other benefits include the following:

-  Short-term capital gains (41% Federal/California income tax): exempt from income tax.

-  Bond interest (taxed at 41% ordinary income rates Federal/California): exempt from income tax.

-  Policies in certain ...Cayman Islands): exempt from creditor attachment.

-  IRS audit risks are minimized since assets held under a qualifying life insurance policy are neither subject to income tax, nor is there any required income tax reporting (under IRC §72(e)(5)). In addition to the substantive tax and reporting benefits, for audit purposes there would be no presumed IRS tax avoidance, due to the fact that life insurance has been granted an “angel exception” (i.e., is an IRS approved transaction) (IRS Revenue Procedure 2004-65, 2004-66, 2004-67, 2004-68).

-  Policy lifetime withdrawals may be tax-free and not subject to tax reporting (as either a return of premium/basis or a loan). The Modified Endowment Contract (“MEC”) rules may or may not apply depending on policy design.

Offshore Asset Protection Trusts

An OAPT formed by a U.S. person which through any conceivable reading of the document, can benefit a U.S. person is tax neutral.

Internal Revenue Code §679(a)(1) states:

  • “Foreign trusts having one or more United States beneficiaries."

   "(a)(1) In general.

  • A United States person who directly or indirectly transfers property to a foreign trust … shall be treated as the owner... if for such year there is a United States beneficiary of any portion of such trust".

Any machinations done in an attempt to hide the true person who transfers assets to the IAPT or the true beneficiary of the IAPT is unlawful.

International Business Corporations

The U.S. tax and reporting obligations associated with a foreign corporation apply, including rules pertaining to Controlled Foreign Corporations (CFC), and to a lesser extent Foreign Personal Holding Companies (FPHC) and Passive Foreign Investment Companies (PFIC). Collectively, the above rules are referred to as the “anti-deferral rules” and are applicable, if the IBC has a certain percentage of actual or deemed owners that are “United States person.”

A CFC is a foreign corporation of which one or more U.S. shareholders own, during the taxable year, more than 50% of (1) the total combined voting power of all classes of stock of such IBC entitled to vote or (2) the total value of the stock of the IBC.

A U.S. Shareholder is a U.S. citizen who owns stock directly, indirectly, or constructively. This means you are the owner if (i) you own the IBC directly or (ii) indirectly (the IBC is in someone else’s name but you “somehow” can at your option obtain that ownership).

Direct and indirect shareholders of a CFC must include in their income their share of the CFC’s “subpart F” income, which generally includes passive income such as dividends, interest, royalties, rents and annuities, as well as any increased investment in U.S. property.

You must report the income whether you repatriate it or leave it in the corporation's foreign bank account.

Any machinations done in an attempt to hide the true person who owns the IBC is unlawful.