Michael Seltzer is a founding member of Vérité Group, LLC, specializing in advanced life insurance structuring and funding strategies.
One area of our practice that’s gaining increasing attention is U.S. life insurance planning for foreign national clients with U.S. situs assets. These assets could be exposed to future gift and estate taxes and can include investment in U.S. companies, such as stocks or bonds, or real estate holdings (personal or commercial). These cases are often more complex than domestic ones and involve an experienced team of professionals including a trust and estate planning attorney and accountant who understand the intricacies of international planning.
For foreign nationals investing in the U.S., whether in real estate, tangible property, business assets or stock in U.S. corporations, there’s a looming concern regarding potential U.S. estate tax liabilities. Unlike U.S. citizens who benefit from a generous estate and gift tax exemption currently set at $13.61 million, foreign national investors face a starkly different scenario with a mere $60,000 exemption. This discrepancy means that U.S. situs assets exceeding $60,000 could be subjected to a hefty tax liability of up to 40%, based on the 2024 top tax rate.
These challenges are similar to those faced by U.S. citizens with estates valued above the exemption threshold. Just as domestic investors grapple with liquidity problems and the risk of depleting legacies due to estate taxes, foreign national investors encounter similar hurdles. However, in recent years, U.S. life insurance carriers have stepped up to address this dilemma.
Incorporating Life Insurance Into Estate Planning
Recognizing the need for solutions, insurance carriers have launched programs tailored to foreign nationals with established ties to the U.S. These connections, known as the client’s nexus to the U.S., can take various forms, including U.S. residence, real estate ownership, business interests or even holding U.S. bank accounts. Leveraging this nexus, foreign national clients facing future U.S. tax liabilities can now apply for U.S. permanent life insurance coverage.
These insurance policies, often structured through irrevocable life insurance trusts, serve as a multifaceted tool in financial planning. Not only do they provide a means for estate preservation by covering potential tax liabilities, but they also use versatility in addressing other financial needs. Foreign national clients can utilize life insurance for income protection, business purposes, asset allocation strategies and other financial planning objectives.
In our experience, we have seen an increase in citizens from Asia and Latin America seeking U.S. life insurance coverage (although the scale of the market is much broader). Most of these clients have business as well as personal interests in the U.S. and will owe U.S. estate taxes upon their passing. While we possess insurance planning expertise, one challenge has been establishing partner advisors and planners in these markets who speak the language and understand the culture.
At the higher end of the market, where clients seek death benefit coverage of $10 million or more, premium financing strategies come into play. While not suitable for all clients and carrying additional risks, premium financing offers cash flow flexibility for qualified individuals. Clients and their advisors can tailor premium finance solutions to meet the unique planning needs of high net worth foreign national clients.
Additional Considerations
Clients best suited for premium finance have better alternative uses for their capital than paying life insurance premiums. Most are business owners or accredited investors who view paying premiums for permanent life insurance as a strain on their free cash flow, which they could otherwise reinvest into their business or investment portfolios and earn outsized returns. Financing the premiums, while not eliminating cost, can reduce and add flexibility to the annual outlay and cash flow burden of acquiring permanent insurance.
To qualify for this strategy, a client must have unencumbered, nonqualified, liquid (cash or cash alternative) assets in the U.S. that can be pledged as collateral to help support the transaction. Additionally, they should have sufficient cash flow to pay the loan interest annually. Most importantly, the client must have a need for U.S. life insurance.
The top risks in premium financed life insurance to be aware of include (1) interest rate risk. If borrowing costs increase, the debt payment could become more expensive. (2) Policy performance and carrier risk: If the insurance policy underperforms projections, additional collateral may be required to support the transaction. (3) Credit risk: Similar to most loans, the borrower must remain in good standing financially to carry and renew the loan as needed. (4) Tax risk: Policies with loans that lapse may have potential tax consequences.
Given the complexity, it is essential to have an experienced team of planners and insurance professionals involved in the implementation and ongoing annual maintenance to ensure the strategy is successful.
Another Tool For Preserving Clients’ Wealth
Life insurance can play a critical role in financial planning for foreign national investors looking to minimize their U.S. estate tax exposure. By leveraging the offerings of U.S. life insurance carriers and crafting tailored strategies, advisors can help these clients mitigate tax liabilities and preserve their legacies. As the global economy continues to intertwine, proactive planning becomes paramount, ensuring that foreign national investors can navigate the intricacies of the U.S. tax landscape with confidence and foresight.
Additionally, as regulations evolve and geopolitical dynamics shift, staying abreast of changes in tax laws and international agreements is imperative. Advisors must remain vigilant in monitoring legislative developments and adjusting their strategies accordingly to best serve their clients’ interests.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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