Offshore Planning for High Net Worth Mexican Residents. Presented by Gordon Anderson December 1, 2011

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1 Offshore Planning for High Net Worth Mexican Residents Presented by Gordon Anderson December 1, 2011

2 Agenda Introduction to PPLI PPLI Strategies for the Mexican Market Unit Trusts Canadian Structures For information only and not for public use. 2

3 The Role of Insurance in Financial Planning FAMILY SECURITY PLANNING Applicable for clients wishing to ensure the future financial security of their family May replace income of family member and/or lost opportunity to grow wealth May also be designed to meet legacy planning needs INHERITANCE EQUALIZATION PLANNING Applicable for clients wishing to pass different assets to different family members. Popular with clients with family business who have active and inactive family members May also be used in combination with forced inheritance mitigation planning ASSET DIVERSIFICATION PLANNING Applicable for clients seeking to diversify and/or protect wealth May integrate conservative investments into portfolio May be used by clients seeking to replenish lost wealth in recent market turmoil ESTATE / INHERITANCE TAX PLANNING Applicable to clients with potential death tax liability in home or foreign jurisdiction Provides funding to pay tax Prevents assets from having to be sold or leveraged to pay tax liability For information only and not for public use. 3

4 The Role of Insurance in Financial Planning DEBT REPAYMENT Applicable for clients wishing to repay outstanding liabilities and pass assets clear Protects against creditors calling outstanding loans Prevents assets having to be sold to pay off outstanding debts Buy-sell agreements Executive Retirement Funding MULTI-JURISDICTIONAL TAX PLANNING Applicable for clients who have assets or family members in multiple jurisdictions Ensures proper planning to address tax and legal considerations Popular for US and UK beneficiary and preimmigration planning TAX OPTIMIZATION PLANNING CHARITABLE GIVING Applicable for clients who have tax planning needs May provide tax efficient investment structure via income tax-deferred accumulation of assets and taxfavored access to funds Applicable for clients with charitable giving inclinations Provides that charitable donation goals are met in efficient manner May provide increased recognition for gifts and/or maximize charitable contributions For information only and not for public use. 4

5 Introduction to Insurance and PPLI TYPE OF INSURANCE NEED TEMPORARY PERMANENT TERM INSURANCE WHOLE LIFE UNIVERSAL LIFE VARIABLE UNIVERSAL LIFE PRIVATE PLACEMENT LIFE Temporary Protection Permanent Protection Permanent Protection Permanent Protection Permanent Protection No Cash Value Non-Renewable at Older Ages Availability & Capacity Constraints Non-Transparent Pricing Premium & Death Benefit Flexibility Cash Value (Tax Deferral) Potential Rate of Return Insurer Manages Assets 3-4% Guaranteed ROR Capacity Premium & Death Benefit Flexibility Market Generated Returns No Guaranteed ROR Moderately Competitive Pricing Availability & Capacity Constraints Premium & Death Benefit Flexibility Client has input into investment solution High Investment Flexibility No Guaranteed ROR Highly Competitive Pricing Significant Capacity Premium & Death Benefit Flexibility For information only and not for public use. 5

6 Private Placement Life Insurance (PPLI) Offers life insurance protection at institutional pricing Allows the owner to maintain control of the underlying investments through the investment manager of choice (subject to Investor Control rules if US connected PPLI) Provides for a high degree of benefit and premium customization Premium can be paid using an existing investment portfolio, without the need to liquidate invested assets Policy can be configured with high or low levels of insurance component Offers the potential for tax deferral and optimization opportunities Allows for designation of specific insurance pay-out contracts per beneficiary for estate succession planning Acts as an asset as it contains significant cash value that may be withdrawn or used as collateral for loan Provides high level of confidentiality and identity protection Complimentary Estate Planning for HNW Individuals For information only and not for public use. 6

7 Typical Domestic Universal Life Pricing *BOY, Pricing may reflect expenses in first year or amortized in attempt to enhance early year CSV s Domestic UL commission costs are frontloaded lengthening time to breakeven For information only and not for public use. 7

8 Offshore PPLI For information only and not for public use. 8

9 Benefits of a Trust Structure Allows for acquisition of life insurance Offshore and US insurers typically require trust ownership, as they are not authorized to conduct business in a client s home country Provides provisions for control of policy if settlor becomes incapacitated Example: At disability of settlor, settlor s spouse or advisor receives rights to instruct trustee on trust assets (including life insurance policy) May provide provisions for distribution of life insurance proceeds in customized manner Example: Policy death benefits are only distributed to beneficiaries after they attain 30 years of age, become married, have children, graduate college, etc. May protect against creditors Depending on design and location of trust, assets of trust may not be subject to seizure by creditors of the settlor May Assist with minimizing US Estate Taxes May mitigate forced inheritance rules Depending on design and location of trust, assets of the trust may not be considered part of settlor s estate for forced inheritance planning purposes. Beneficiaries Financial Assets Settlor The Family Trust Private Investment Company (Optional) Real Estate Trustee Life Insurance For information only and not for public use. 9

10 Reasons for Offshore Insurance Estate planning Asset Protection Access to Foreign Investment Options (no PFIC issues if US connected) Control of Income inside Foreign Non-Grantor Trusts Eliminates onshore government premium taxes For information only and not for public use. 10

11 US Compliant PPLI Offshore vs onshore: Eliminate premium tax of up to 2 %. Avoid excise tax if 953(d) insurer Investor control rules typically would result in a discretionary portfolio and/ or Insurance Dedicated Funds 817 diversification rules MEC vs Non-MEC Avoids PFIC rules so more international choices US estate tax exemption of US$5 million until 2012 For information only and not for public use. 11

12 953 (d) Carriers vs. Non 953 (d) Carriers US Persons Insured Non-Resident Alien Insured Non-Resident Alien Insured Generally use Policy issued by domestic or 953(d) Carrier Use of non-953(d) Carrier may create US excise tax issue (check Treaty) Generally use US Compliant Policy due to section 7702(g) Consider use of frozen cash value policy (if available) where capacity is issue Moving to US temporarily Wants to defer tax while US Resident Wants to cash out, free of US tax, once departed Generally use US Compliant Policy issued by non-953(d) carrier Either life or annuity No W/H or reporting to IRS on annuity withdrawals on surrender or distributions from MEC life Policy Life proceeds tax-free if paid while he/she is US Resident With Foreign Trust with US Beneficiaries Generally use US Compliant Policy issued by a non-953(d) carrier Can consider frozen cash value Policy where capacity is issue With Foreign Trust with no US Beneficiaries Generally use non-us Compliant Policy issued by non-953(d) Carrier For information only and not for public use. 12

13 Agenda Introduction to PPLI PPLI Strategies for the Mexican Market Unit Trusts Canadian Structures For information only and not for public use. 13

14 Offshore PPLI for the Mexico Market Insurance must be sold offshore Was very popular in Mexico dominated by niche players Tax changes resulting in the 30% tax when death benefit paid to Mexican resident insured Consider a number of insureds or a group product where you can continue to add lives One possible strategy is to have an offshore company. Insurance proceeds are not taxed in Barbados nor in Mexico Most UHNW Mexican families have US connections so consider US Compliant PPLI Most UHNW Mexican families have US connections so consider US Compliant PPLI Another option is to consider a Unit Trust structure For information only and not for public use. 14

15 Carriers Argus in Bermuda (Canada, US and global) Amphora in Barbados (Canada, UK, and Venezuela, and updating Mexico) Others; American General, Prudential, BIISL, Castle Re, Sun Life (all in Bermuda) Some carriers indicate that their products are compliant when they may not be so detailed due diligence important For information only and not for public use. 15

16 PPLI Candidates UHNW clients sheltering investments Asset protection Liquidation events Inbound planning into US or Canada US connected files Global family businesses Offshore corporate planning Maximizing retirement options Cleaning up structures No pensions For information only and not for public use. 16

17 Agenda Introduction to PPLI PPLI Strategies for the Mexican Market Unit Trusts Canadian Structures For information only and not for public use. 17

18 The Unit Trust Structure The Charitable Trust ( CT ) Client Forward Purchase Agreement Charitable Trust Unit Trust The CT is a standard discretionary charitable trust. The purpose of the CT is to establish the UT and to hold the initial/founding units of the UT. The initial/founding units allocated to CT have no right to capital or income. Assets/ Bank Accounts/ Underlying Company On winding up of the UT the CT may receive a distribution if approved by the other units holders. The CT may be governed by English or Jersey law. For information only and not for public use. 18

19 The Unit Trust Structure The Unit Trust Instrument ( UT ) Charitable Trust The UT is a lengthy document which is governed by the laws of Jersey. Client Forward Purchase Agreement Unit Trust It is a fairly standard Jersey UT which has been carefully tailored for this Mexican tax planning opportunity. The UT deals with, amongst other things, the rights of the unit holders in relation to capital and income and how it may be wound up. Assets/ Bank Accounts/ Underlying Company For information only and not for public use. 19

20 The Unit Trust Structure The Forward Purchase Agreement ( FPA ) Charitable Trust The FPA is a contract governed by the laws of Jersey. Client Forward Purchase Agreement Unit Trust Assets/ Bank Accounts/ Underlying Company It sets out the basis upon which the client transfers the assets to the UT in consideration for the right to subscribe for units of the UT in the future. The parties to the contract are: (1) the trustees of the UT; and (2) either the client or a trust which has been established for the client (and his or her family). Over time, the FPA has been carefully revised to incorporate various comfort provisions for the client. For information only and not for public use. 20

21 Agenda Introduction to PPLI PPLI Strategies for the Mexican Market Unit Trusts Canadian Structures For information only and not for public use. 21

22 Canadian Structures Canadian Transnational Trusts Located in New Brunswick As long as settlor, beneficiaries, and administration are outside of Canada, there is no Canadian tax Set up cost: $3k Annual fee: $12k Canadian Corporations: Federal or provincial (extra-provincial registration) Canadian directors not required for NB, NS, Quebec and BC Tax rates lowest in Alberta Set up cost: $3k Annual fee: $4k (includes one Cidel director) For information only and not for public use. 22

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