During the last two years, much has happened which will impact the use of offshore trusts as the principal planning tool for the future. In the United Sates, new legislation aimed specifically at the used of foreign trusts, and in the United Kingdom changes proposed in the Finance Bill, will reduce the number of planning opportunities in which a trust can play a leading role. In some circumstances, it has made sense for trusts to be distributed to beneficiaries. These changes have resulted in clients and their advisors looking for alternative estate planning strategies. Insurance is one alternative to consider.
The use of insurance in planning for wealthy individuals is on the increase in many jurisdictions due to the different manner in which insurance is taxed in comparison to trusts. Insurance has also been used by some advisors as an alternative to trusts when clients have preferred the concept of a legal contract to that of the relationship between beneficiary and trustee.
One of the new planning ideas which makes use of insurance is known as a "Deferred Variable Annuity". The term "variable" refers to the investment return which is achieved on the assets held within the annuity policy, and "deferred" refers to the fact that benefits are postponed until the beneficiary attains an age selected at the time of the establishment of the policy.
The Deferred Variable Annuity is especially effective, and is a substitute for the used of a foreign trust, for pre-immigration tax planning. For example, where a non US person is interested in becoming a US resident for a period of time, the individual will become taxable on world-wide income on taking up residence. By purchasing a Deferred Variable Annuity policy under which distributions will only be made after a fixed period of years, based upon the anticipated stay within the United States, it is likely that income held within the policy will not be subject to United States tax.
However, great care must be taken when drafting a Deferred Variable Annuity policy because if the policy does not comply with US rules, it will be completely ineffective, and earning on the policy will be taxed currently to the US person. The rules are so technical that it is impossible for the annuity to qualify for US rules unless designed to do so.
Last year the sales of onshore variable annuities grew by 16% and total sales reached an incredible US$85 billion. Statistics for offshore annuities are not available but they are likely to be experiencing similar rates of growth. Certainly, there has been a considerable increase in the number of variable annuity products available in the offshore market.
In many countries, Governments have granted special tax advantages to individuals who wish to provide for their families through life insurance. Whilst income and capital gains are subject to tax, with proper structuring the proceeds of insurance are not subject to tax. Therefore, when creating an estate plan, making use of life insurance cannot be ignored.
The principal benefits of utilising an offshore insurance company for this type of planning is their ability to structure products which are more in keeping with the individual requirements of wealthy clients as opposed to the more inflexible onshore products aimed at the retails market. While the tax benefits of foreign insurance policies are no greater than those of a domestic policy, it is likely that they will offer increased asset protection and a wider choice of investment strategies.
Guernsey may well become a centre for this type of work as the protected cell legislation, introduced recently, provides an excellent structure for an offshore insurance company. Each cell is used as a segregated account for assets supporting a policy. This provides protection to the beneficiary of the policy, when also meeting the requirements of tax legislation. In addition, as Guernsey is regarded as the leading offshore insurance centre in Europe, there is the availability of local expertise to develop new insurance products.
These examples of the use of insurance as an alternative to trust demonstrate the way in which planning for the international private client is adapting to changing circumstances, and how offshore jurisdictions such as Guernsey can develop their services to meet these changing needs.
This article provides a general outline on the subject at the time of writing. It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.