Consider the case of an emergency room physician and his attorney wife. Acutely aware of the liability inherent in the doctor's work, they were looking for strategies to protect their assets. The wrinkle was that they, along with another partner, had invested considerable sums in commercial real estate. Real estate, of course, is one of the hardest assets to protect: It's not a moving target, and it's often hard to justify the economic benefits of holding it in trust, which usually carries adverse financial consequences. The solution? Use the real estate, which was held in a series of limited liability companies in an offshore trust, to buy a private insurance contract.
This tactic offered significant tax advantages by allowing exchanges of property in a tax-free environment--freezing the value of the real estate at inception. A currency hedge, the appreciating assets will pass without estate taxes, and if structured properly, can provide a tax-free income stream.
A private insurance portfolio is the Holy Grail of high-net-worth advising. It is a unique vehicle that offers a set of advantages clients cannot get anywhere else: It will supercharge their investments, internationalize their portfolios, allow access to investments that are not available to [average] Americans, offer substantial tax advantages, hedge against the U.S. dollar, and provide ironclad asset protection. And the best part is, nobody knows about them. If you want to work with high-net-worth clients and offer them something that no one else is talking about, private insurance portfolios are the way to go.
With a minimum investment of $1 million, private placement portfolios are used typically by families with a net worth in excess of $5 million--often far in excess. These days, sophisticated investors are concerned with privacy, taxes, currency risk and global diversification, in addition to asset protection. Unfortunately, there are no domestic vehicles that offer all of these benefits. In fact, in most cases, advisors can't even talk about strategies that offer benefits such as these on U.S. soil. Enter private insurance portfolios.
A private insurance portfolio--sometimes referred to as a portfolio bond, private placement life insurance, or insurance wrapper--combines a bank account, a brokerage account, and an insurance policy under one asset-protected umbrella. Here's how it works: An investor enters into a contract in his or her own name with an insurance company, usually domiciled in Switzerland (although the privacy laws and no-tax environment of Liechtenstein are more attractive to some investors). The insurance company then opens an account with a private bank selected by the investor, who receives the policy from the insurance company. Legally, the investor is the client of the insurance company and the insurer is a client of the bank. The investor can designate the bank or an outside investment advisor to manage the account. The investor can then designate a person, persons, or a legal entity as beneficiary.
Think of the private insurance portfolio as a sophisticated holding vehicle in which the investor, through his financial advisor, can direct the insurance company to invest in a wide range of investments: typically, high-return, wealth-building opportunities with long time horizons. For instance, PIPs often hold hedge funds, private equity, venture capital or offshore mutual funds (which are currently some of the best performing investments on the planet). With these high-powered investments free to compound in a tax-free environment, they can create a level of wealth unparalleled by other vehicles.
To wit: Here are some of the myriad benefits of private insurance portfolios:
Separate and Simple Estate Planning. Although a legal entity such as an estate planning trust can be named as an irrevocable beneficiary of the private insurance portfolio, this type of investment is also well suited for making distributions separate from an estate. Neither power-of-attorney, nor last will, nor certificate of inheritance is required for payments to be made upon the policy owner's death. Beneficiaries receive immediate access to the funds according to the payment method chosen by the policy owner.
Confidentiality and Privacy. In addition to the confidentiality provided by an account in a private bank in the name of an insurance company, a second layer is provided by the insurance itself. In some jurisdictions, insurance companies treat client information as do banks: No information about clients can be provided to any third party--period. What's more, now that U.S. taxes must be withheld on U.S. assets in foreign accounts and with the tougher reporting requirements for investments in offshore trusts, insurance vehicles--when correctly structured and in the right jurisdiction--can add a high degree of privacy and as well as tax advantages.
Trust Compatibility. Rather than replace offshore trusts, a private insurance portfolio can complement a trust and even strengthen its protection. For example, assigning investments to an offshore trust is much cheaper and easier if [the investments] are grouped together under one private insurance portfolio. It also greatly simplifies the tax treatment of the vehicle and the reporting requirements, by reducing the number of assets listed as well as in meeting the conditions for tax deferral.
Insurance Coverage. In a PIP, an estate's wealth is preserved through the insurance death benefit: Until the policy's cash value reaches the death benefit, the insurance company bears the entire downside risk of the portfolio's performance. Depending on the investor's own needs and requirements for heirs, additional insurance coverage can also be provided in case of an untimely death. Such coverage can also be adjusted during the term of the contract--a feature that can become very important if a surviving spouse is forced to pay off a mortgage or if heirs need cash to buy out business partners.
Flexibility. In addition to being able to choose the amount of insurance coverage, a client can choose to receive a payout over several premiums or in a single payment. Since the underlying investments can be freely selected from a global palette--not available to the general U.S. public--the client or his investment advisor can optimize performance and manage risk through wide diversification and hedging strategies.
Tax Efficiency. A private insurance portfolio offers tremendous tax benefits (available from few other investment vehicles) without the need for expensive and complex trust structures: 1) Tax-inefficient assets can grow tax-deferred; 2) Investment gains can be free of all income tax; 3) Tax obligations on reinvestment are eliminated; 4) Death benefit to the estate is income tax-free; 5) There is the potential to exclude the death benefit from estate taxes altogether; 6) Loans and withdrawals receive favorable tax treatment. The degree of tax efficiency will depend on the tax laws of the client's domicile. In most jurisdictions, it is possible to achieve tax deferment--if not total elimination--of income, capital gains, and even estate taxes.
Global Investment Flexibility. A PIP is a holding structure through which a client, in conjunction with his advisor, can request that the insurance company invest in nearly any investment vehicle. As most of us know today, international investments have been huge winners in recent years. How can an individual investor gain access to the best investments in these markets? You cannot do it through a U.S. broker. However, a private insurance portfolio supports an array of high-return, wealth-creating assets such as hedge funds, private equity and venture capital which are unavailable through traditional insurance solutions. What's more, the portfolio may be denominated in your currency of choice; underlying accounts and assets may be denominated in most world currencies. And, as we saw in the example above, some private insurance portfolios allow for the insertion of existing assets and portfolios rather than cash (called premium-in-kind), so a client need not sell assets to fund this strategy. It's an option that offers a variety of sophisticated planning techniques, including the transfer of highly appreciated assets.
Asset Protection. The key goal of a private insurance portfolio is to provide protection from creditors or litigants arising from unforeseen, adverse events. Swiss insurance companies are among the safest in the world and are domiciled in jurisdictions that provide the highest levels of protection from creditors, frivolous lawsuits and government confiscation. Additionally, unless otherwise required by law or directed by the policy owner, the relationship between an international insurance company and a policy owner is held in strict confidence under the laws governing the insurance company. Life insurance is one of the very few forms of investment that is often inherently protected from creditor claims. Private insurance portfolios, in particular, lend themselves to asset protection planning and, for many individuals, will be a principal motivation for the investment.
When advisors set out to create an asset protection plan, they start by considering the alternatives. Often, we're comparing private insurance portfolios with trusts. Not only are trusts complex and costly, but people sometimes have a hard time giving up control of their assets. But the real problem is that judges are often dubious of offshore trusts. It's much harder to come up with an economically or financially viable story for going offshore. With tax-efficiencies, lower costs, currency diversification, and estate insurance protection, private insurance portfolios answer those questions before they arise.
Private insurance portfolios can be powerful tools to differentiate a financial advisor in today's ultra-competitive environment in the affluent marketplace.
Darrell Aviss is managing director of SwissGuard International (www.swiss-annuity.com), a firm that specializes in Swiss investment strategies for high-net-worth investors. He is the author of "Strategies for Protecting Wealth," published by McGraw-Hill.