“If you spend $5 million for a life insurance premium and you get a $30 million death benefit, you just went six to one on your money and could have paid the entire estate tax out of that money,” Wolfe said.
Creating an offshore irrevocable life insurance trust delivers even greater tax advantages and more flexibility, according to Wolfe. For U.S. taxpayers, Puerto Rico offers the best of both worlds. The island is a U.S. territory and considered part of the U.S. for many practical purposes, but with the design and investment flexibility typically found in other offshore financial centers.
“The reason to do it offshore is that there is no restricted menu of investments,” said David E. Richardson, CEO of Mid-Ocean Consulting in Nassau, Bahamas. “You can invest the cash-value premiums in any investments you want, including hedge funds. Onshore, you’re restricted to a menu of investments that is determined by state insurance regulations, which often limit you to mutual funds or bond funds and which often underperform other investments.”
The strategy requires that the investments of U.S. taxpayers be held by a Puerto Rico-issued life insurance policy. Doing so will streamline tax reporting for U.S. citizens by eliminating the need to file a Foreign Bank and Financial Account (FBAR) disclosure form, which is required for investments in other offshore locations, and minimizing the likelihood of an Internal Revenue Service audit, according to Richardson.
Estate Modeling
James at Glenmede helps ultra-rich clients develop their estate plans by creating a financial model that shows them what will happen to their estates after they die.
“I take a client’s balance sheet and pretend that they’ve passed away,” said James. “I show them that this is how much is going to your family or friends, this is how much is going to taxes, and this is how much is going to charity.”
This type of financial model simplifies complex legal documents that many of his clients either do not have the time or inclination to digest completely. Most clients look at the financial model and “usually have very strong feelings” about the amount of tax their estates may be subject to, how much is being left to different heirs and their access to various assets, he said. The financial model helps them to make adjustments accordingly.
Privacy Concerns
The law requires that an individual’s last will and testament be filed with a local probate court. That makes those documents public and available to anyone, as Gandolfini’s death illustrated. Within a few hours of his passing, Gandolfini’s estate documents were filed with the New York Surrogate Court. His will was posted on the Internet soon after and became the focus of media attention and public discussion.