As someone looking to protect your income and assets from taxation in an effective and legal way, you will often find yourself being introduced to all manner of complex approaches. The problem is that whilst you want to achieve the end result, you also need to know a little about the options you’re choosing between.
Frozen Cash Value Life Insurance (FCV) is a common option you’ll hear mentioned, so we’re going to take a brief look at the basics you need to know.
Why Life Insurance?
When structured and planned correctly, a life insurance policy is a legal and effective means of reducing your taxable liability. A correctly structured and implemented policy will allow you to reduce your exposure to tax whilst also giving you a greater range of options when it comes to making distributions and payments. Whilst the fine details would be a matter for a legal expert, we can take a look at the basics so you know what you’re dealing with.
What Does the Policy Look Like?
An FCV policy will be structured as a variable life insurance policy. Simply put, this means that you can change the size and frequency of the payments you make into it, giving you greater flexibility when it comes to reducing your taxable liability.
There will typically be a requirement for an initial US dollar payment into the policy, whilst the acceptance of premium payments in kind are always at the sole discretion of the insurer. Examples would include: stocks, certificates of deposit and bonds. The cash value would then be commonly defined as the fair and reasonable market value of the assets within the policy, minus any unpaid expenses and fees, as well as ay loans which have been taken out against the policy.
Do You Still Have Access to Your Assets?
Given the name of this type of policy you’d be forgiven for thinking that you would no longer have access to an asset once it has been included in your policy. This is however not the case, with the vast majority of FCV contracts allowing the policyholder to make a partial surrender of the policy value. This would be up to, but not exceeding, the agreed value of the cumulative premiums. In other words, you wouldn’t be able to withdraw more than you’ve already put in. Another popular option is to take out a loan against the policy for up to 90% of the total of the premiums. The former is often preferred as it places no liability on the life insurance policy itself.
Key Things to Consider
Whilst the intricacies and nuance of a FCV policy will be a matter for a trained legal professional, there are a few key things that it would serve you well to know:
- The FCV policy must qualify as a valid life insurance contract under the law of all applicable jurisdictions. This is especially important for cross border planning
- The US income tax implications must be considered during the policyholder’s lifetime, as well as after their passing. The same is true of the beneficiary
- There are a number of complex diversification criteria which need to be met. A common example is the need for at least 5 distinct investments
Now that you’ve had a brief introduction to the basics of FCV policies you’re equipped with enough working knowledge to get in touch with an expert. They’ll be able to tailor their approach to best meet your individual needs and circ*mstances, allowing you to plan for your future in a pragmatic and prudent way.
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Published by Matthew Ledvina
Through his almost 15 years of experience working as a US tax adviser, Matthew Ledvina has provided advice to his clients on areas involving trusts, banking and taxation. This has required him to work in several of the world’s major economies, including the United States, France, the United Kingdom and Switzerland. Matthew holds memberships to multiple professional bodies, such as the Society of Trust and Estate Practitioners, the International Tax Planning Association, the International Bar Association, and the International Business Structuring Association. Serving in several senior positions for global tax advisory firms, Matthew has worked with clients in countries that span every continent, including Switzerland, Italy, France, Spain, the United Kingdom, the US and Canada, as well as in Asia and Latin America. Matthew co-founded a law firm in 2010 with locations in Geneva, Zurich and Madrid. The firm offered services that were focused on providing assistance and advice on taxation and trusts, serving clients in the US, France, Spain, Italy, Middle East and Latin America. Amongst other activities, he is currently a cross-border US tax adviser for Pilotage Private Office and a director for a leading Fintech company in London which focuses on asset-backed lending servicing the needs of family offices.Matthew became heavily involved in the US Department of Justice’s Swiss Bank Program through his work with Swiss clients. This has seen him undertake voluntary disclosures for clients who have assets in banks and other financial institutions based in Switzerland. In his spare time, Matthew enjoys playing tennis and skiing. In addition, he regularly reads about topics such as artificial intelligence, history, Regtech in the insurance and banking area, and Fintech focusing on asset-backed lending.View all posts by Matthew Ledvina
