The pain of filing U.S. income taxes for many individuals is over, but the “sting” of writing the check to the IRS still lingers.  This is the time of the year to evaluate not only last year’s tax liabilities, but to focus on strategies to reduce tax liabilities for 2011 and beyond. 

One strategy to consider is an Offshore International Private Placement Life Insurance policy.  This article will focus on a key advantage -- especially in light of the current worldwide economic environment -- no taxes!  Experts are concerned about how the U.S. government will pay for all the massive real estate and corporate bailouts over the last several years.  Recent discussions include a combination of reducing government spending and increasing taxes, nothing really that new.  The possibility of increased taxation will be a significant future concern.

TAX FACTS

With the Tax Relief Act of 2010, the top maximum tax rates for 2011 and 2012 will remain at 35%.  The top rate will go to 39.6% beginning in 2013, absent further legislation. 

The special tax rates on long-term gains and qualified dividends will expire on December 31, 2012.  Starting in 2013, the tax rate on long-term gains will be 20%. Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates.

HIDDEN TAX IN THE HEALTH REFORM LEGISLATION

This is an interesting change that many individuals may not be aware of:  Starting in the year 2013, the Medicare tax will be expanded. The tax rate will be increased for higher-income individuals, and the income subject to the Medicare tax will be expanded to include investment income.  This additional tax is called the unearned income Medicare contribution tax, and was enacted as part of the health care reform laws.  The Medicare tax rate on net investment income will be 3.8%.

So after December 31, 2010, the highest marginal tax rate on net investment income will be 43.4%.  This represents 39.6% ordinary income tax, plus 3.8% Medicare tax.

Many individuals have just realized another solid year of stock market gains.  For example, since the horrible 2008 stock market performance (-37%) the S&P 500 has performed quite well:   up 26.48% in 2009 and 15.06% in 2010.  How much of your gain did you pay in taxes, because of unrealized and realized short- and long-term gains?   If you own a hedge fund or a broad-based mutual fund, turnover and taxes can become significant drag on the overall rate of return of your portfolio.

Consider Offshore International Life Insurance to Reduce Your Investment Portfolio Tax Exposure

International life insurance policies offer tax-free build-up of cash values, including dividends, interest, unrealized and realized capital gains.  

The common Offshore life insurance policy is "private placement universal life insurance" (PPUL).  What does that mean?  "Private Placement" means it is offered only to  persons who complete the questionnaire required to be approved as a qualified investor.       "Universal" life insurance requires no recurring deposits after the initial deposit, as long as assets held by the policy cover its costs.

A PPUL permits complete customization to meet individual investment objectives. The policy can be used as a platform for investments taking virtually any form, including the tax-inefficient hedge funds and mutual funds that, without the use of an insurance framework, would be exposed to unfavorable U.S. tax treatment as mentioned above. Investors have full discretion to nominate trustees, custodians and asset managers.

Keep in mind, the investments are not part of the insurance carrier's general account. Rather, the assets are placed in separate accounts that are legally segregated from claims of the insurance creditors. There is no risk to these assets in the event of carrier bankruptcy or reorganization.

Eliminating  the "drag" of taxes on investment gains can significantly enhance the portfolio's overall rate of return -- and that alone could be enough reason to use offshore life insurance as part of your investment strategy.  But the policies offer other important advantages, too:  increased asset protection, decreased opportunity for the estate to be contested, access to international investments, and increased privacy.

Potential U.S clients must be aware that offshore insurance may not be negotiated, solicited, underwritten, or placed within the U.S.  The process must be initiated and managed from start to finish outside of the United States.  Consequently, anyone interested in customized offshore life insurance must contact and arrange to meet a representative of an offshore carrier outside of the U.S. to receive all of the benefits of offshore insurance products.