When a U.S. connection comes with a tax cost

Unlocking the Value of Life Insurance in U.S.-Connected Planning

In today's global landscape, planning remains paramount. This is especially true for individuals with connections to the U.S., whether through investment, family ties, or citizenship/residency status.

U.S. connections can come with a tax cost. For example, U.S. citizens and green card holders (i.e. permanent residents) are often unable to escape U.S. taxation. U.S. investments, such as ownership in real estate interests or stocks in U.S. companies, can also cause U.S. tax to be owing.

Acquiring and benefiting from life insurance can provide liquidity for, alleviate, and in some cases, fully mitigate the U.S. tax burden faced by U.S.-connected individuals.

Defining U.S.-Connected

Taxation in the U.S. largely comes in two forms: income taxation and transfer taxation (including gift and estate taxes). U.S. transfer taxes can range up to 40%, while income taxes, depending on the state of residency, could range up to 50+%.
Connection to the U.S. can vary in its scope and consequence. For instance, U.S.-connected can mean:

• U.S. citizens/green card holders, who often have inescapable U.S. tax exposure on both income and gifts/inheritances. This may also include non-U.S. persons looking to migrate to the U.S. and take up residency eventually;
• Non-U.S. persons with significant exposure to U.S. assets and investments. For example, non-U.S. persons who directly own investments in U.S. real estate or U.S. shares of more than USD 60,000 may have substantial U.S. estate taxes owing upon their passing; and/or
• Non-U.S.-based families with children or beneficiaries residing in the U.S., who face significant income taxes and multigenerational transfer taxes once the family wealth is passed to such U.S. persons.

Planning around U.S. connections 

It is unrealistic to expect clients to know the upfront U.S. tax costs that are built into their U.S. connections, and there is usually no single solution to their tax worries.

Nevertheless, individuals can still take meaningful action. Such planning ought to be considered as early as possible, as much of the structuring required may need to be implemented within certain time-frames. For example, clients who are looking to migrate to the U.S. may wish to consider setting up and funding their family Trust prior to moving to the U.S. in order to maximise their transfer tax efficiency.

However, for many families who are already residing in the U.S., achieving a completely zero gift/estate tax outcome legitimately may be challenging. This is where we have seen a pivot in our clients' mindset towards setting aside liquidity to fund such taxes through life insurance. In particular:

1. Life insurance policies with an inherent cash value typically grow free of U.S. income tax.
2. The death benefit (i.e. payout upon death of the life insured) is typically free of U.S. income tax when received by the beneficiaries. Where there is a significant estate tax liability to be met upon one's passing, the life insurance payout is the perfect "asset-liability" match to said taxes.
3. The policies can be implemented and structured in a way that takes into account the level of U.S. connection. For instance, a U.S. person can purchase a U.S.-compliant life insurance policy issued by a U.S. insurer and own it through an irrevocable life insurance trust ("ILIT"). Such a policy would grow on a tax-deferred basis and would not be includable in the owner's estate upon their death, saving significant U.S. estate tax. The ILIT can then make payouts to the beneficiaries in a tax-efficient manner.
4. Non-U.S. persons with beneficiaries in the U.S. can use offshore (i.e. non-U.S.) policies, which can offer attractive features and flexibility. The U.S. beneficiaries in such cases generally receive the payouts free of U.S. tax, too.
5. Where specific needs exist (such as tax-free withdrawals from growing policies), policies can also be structured to meet such needs.
6. For clients who have previously obtained offshore life insurance policies, migration to the U.S. might require them to restructure such policies into U.S.-compliant policies to provide a U.S. income tax-efficient outcome.

Weighing, implementing, and adjusting (as necessary) a plan can address or pre-empt U.S. tax and compliance issues. This often yields not only a better financial outcome, but provides clients with comfort, peace of mind, and a feeling of control over the future in the face of increased geopolitical and economic tumult.

Our role

Howden Private Wealth is uniquely equipped to cater to U.S.-connected clients' needs. We are the only globally based high-net-worth life insurance brokerage which has:

• A fully integrated U.S. team based on both the East and West Coasts of the U.S., who can work seamlessly with our global teams in implementing solutions for clients with all levels of U.S. connections. This includes being able to place U.S.-compliant policies relevant to U.S. persons, as well as offshore solutions offering advantages for clients based elsewhere;
• A team of tax, legal and product specialists that are able to help referral partners, clients and their advisors align on planning opportunities and solutions. The team is dedicated to staying on top of developments in the market and working with insurers to develop solutions that take into account legal/tax/regulatory changes; and
• A growing team of servicing consultants who specialise in providing after-sales service for the clients' families and their generations to come, via annual reviews. Such annual reviews would also include timely updates of tax and market developments that might be relevant to the families' particular circumstances.

We would be happy to discuss our global capabilities and service offering with you in more detail. Please do not hesitate to reach out to us here.

Howden Private Wealth does not provide legal or tax advice. Clients should seek advice tailored to their specific circumstances from an independent legal and tax adviser. 

(Left) Debbie Lau
Chief Executive Officer, US & Chief Product Officer

(Right) Looi Kian Seng
Tax & Solutions Structuring Counsel