Hi ,

In this issue we're going to shed some light on the U.S. Foreign Account Tax Compliance Act (FATCA). Under FATCA, U.S. taxpayers with financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. As most of our readers are American, many of whom already have offshore asset protection trusts, we receive allot of requests for more information on how to best prepare for the enactment of these new regulations.

The IRS has not released their final document on FATCA which will explain how they are going to deal with offshore insurance company's. There is still over a year before FATCA will be in place but why wait for the shoe to drop? Offshore Life Company Policy's will MOST LIKELY be soon considered non-compliant and therefore without tax benefit. We are currently preparing a white paper to define our recommended solution. Those who are already holding an offshore life policy or annuity can do a 1035 transfer into a tax compliant structure, which we will describe in more detail in our next issue. Meanwhile, find below some insight into the implications of FACTA.

It's important to note that while this information is primarily focused on U.S. Tax Law, the solutions that we recommend are highly beneficial for any and all offshore investor.

Warm regards,
Aaron A Day
Editor

Over the last few years, a niche model has emerged for U.S. persons and those with "U.S. connections": the "953(d)" insurance company. Section 953(d) of the U.S. Internal Revenue Code (IRC) allows a non-U.S. insurance company to make the election to be treated as a U.S. taxpayer, which may provide material benefits to the insurance company, policyholders, and beneficiaries. With FATCA looming on the horizon, we think this model will become much more popular over the next few years. The 953(d) carrier should not be subject to FATCA because it is already a U.S. taxpayer and is compliant and transparent. It cannot be treated as an Foreign Financial Institution (FFI) because it is not foreign in terms of the IRC. Moreover, it would not imply an obligation to register with the SEC as an asset manager.

The 953(d) election elegantly addresses a number of the issues with FATCA. As a U.S. taxpayer, the FATCA regime does not affect the 953(d) carrier. It is, in any case, tax transparent. This election results in a big benefit for non-U.S. persons with U.S.-situs assets and/or U.S. person dependents. The U.S. taxpayer status solves the withhold- ing tax issues. The structure is fully tax transparent for U.S. beneficiaries but at the same time retains the tax advan- tages of PPLI. In particular, it provides benefits to those clients with U.S. beneficiaries in their trust structures. In combination with an irrevocable life insurance trust (ILIT), it also avoids the generation skipping tax (GST).

Request more information about irrevocable life insurance trusts.

Problem/Effect: Current U.S. tax law requires that a U.S. Grantor file a Form 3520 to report transfers of property to a foreign trust if the trust has one or several U.S. beneficiaries. In the past, this provision could be circumvented by naming U.S. persons as contingent beneficiaries or by using a discretionary trust. Under the FATCA provisions, which alter Section 679 of the U.S. Internal Revenue Code, a foreign trust is presumed to have a U.S. beneficiary even if the U.S. person is only a contingent beneficiary. In the case of discretionary trusts, the FATCA holds that the terms of the trust must specifically identify a set of non-U.S. persons as beneficiaries for the taxable year or the trust will be qualified as containing a U.S. beneficiary. The section goes further and creates a catch-all refutable presumption that if a U.S. person has transferred property directly or indirectly to a foreign trust, the code will assume there is a U.S. beneficiary. To counteract these assumptions, the U.S. person who has transferred the property must demonstrate that the trust does not have U.S. beneficiaries for that taxable year and would not have U.S. beneficiaries for that taxable year even if the trust were terminated. If this cannot be done, then that portion of the trust will be considered as having accumulated for a U.S. beneficiary and the 3520 reporting requirements are activated. The grantor will also be considered the owner of the trust assets transferred for U.S. income tax purposes during his or her entire lifetime.

Possible Solution: A foreign trust may purchase a private placement life insurance policy. U.S. beneficiaries of the trust are swapped out and become beneficiaries of the policy instead. The trust deed may stipulate that there are "no U.S. beneficiaries" connected to the trust and may even go so far as to say that there never will be U.S. beneficiaries. This should eliminate the grantor's 3520 reporting requirement and even the income tax obligation. Vital, however, is that a U.S. person does not simply purchase a life insurance policy outright, but rather in the name of the trust. Unless a grantor trust is owner of the policy, insurance proceeds may fall into the estate of the insured person upon his or her death and are subject to estate tax.

Use of Trust Property
Problem/Effect: The next set of FATCA provisions is a reaction to the infamous Wyly Case, where trusts were settled and then assets such as artwork and homes were "used" by the U.S. grantors income tax free. While the Wylys were not convicted of any crime in connection to this "use" of trust property, the FATCA lawmakers were determined to ensure this did not become a common practice. Under the FATCA, the use of any trust asset by any U.S. grantor or beneficiary is now treated as a distribution at fair market value unless the trust is compensated by the grantor or beneficiary at fair market value. The distribution triggers reporting (Form 3520) and income tax. Loans, either in cash or marketable securities, are also subject to these provisions if it cannot be established that the market rate of interest is charged and that the loan will be paid back "within a reasonable amount of time".

Possible Solution: Through the life insurance policy, it is possible to take out loans tax-free. Loans are made against the policy rather than the trust at "arms length". While the rules surrounding loans from foreign trusts in light of the FATCA rules are new and untested there is a long-running practice of insurers making loans to policyholders or using the policy as collateral for a commercial bank loan.

Underlying Entity Risks
Problem/Effect: Grantors and beneficiaries of foreign trusts which own part or all of a foreign entity (LLC, IBC, etc.) are themselves considered shareholders / partners / participants of that entity. While this legislation is not new under the FATCA, its enforcement is eased by the FATCA's withholding and foreign account reporting regime. Certain reporting requirements such as the disclosure of a "foreign financial asset" come into effect already for the 2011 tax year.

Possible Solution: By interjecting a life insurance policy between the grantor trust and the foreign entity, the grantor and beneficiaries should no longer be considered owners of the offshore entity. Instead, the life insurance policy should be considered the legal and beneficial owner of policy assets, just as it is under current Qualified Intermediary rules and for U.S. tax purposes. Through the use of a life insurance policy, the trust participants should legally avoid the reporting requirements.

The advantages of private placement life insurance (PPLI) or variable unit-linked (VUL) life insurance are now well known and have become an integral part of wealth planning for offshore advisers. The main benefits are the following:

• Tax optimization and planning,
• Asset protection (ownership transfer of any premium)
• Investment flexibility, in particular for U.S. persons
• Estate, inheritance, and succession planning (tax- free death benefits and tax-free loans).

Request more information about Private Placement Life Insurance.

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