Offshore Life Insurance – The Last Actual Tax Shelter

Believe it or not, there is still a structure on the books that is actually a sanctioned method to defer or eliminate U.S. tax. Offshore life insurance is the last actual tax shelter, but it is only for those with the physical and financial means to pursue it and a strong stomach to withstand the many complexities.

Written by Stewart Patton

A tax shelter is most often just a complicated way to spend money and get in trouble. They range from:

In either case, the taxpayer is simply playing the audit lottery—they’re hoping to not get noticed by the IRS or to create a sufficient smokescreen if they do get noticed.

Contrary to the above structures, offshore life insurance is actually an IRS-sanctioned tax shelter that delivers real results and can stand up to IRS scrutiny (if structured correctly). Like all good things, there’s a catch—the structure has several rigid requirements and tax complications a-plenty. Do not even consider pursuing this structure without an experienced tax attorney by your side.

Offshore Life Insurance Basics

The broad outlines of the structure are as follows:

  1. First, you contribute cash and/or assets to an offshore trust, which can be set up in various ways depending on your estate planning and other long-term goals.
  2. Next, the trust you formed purchases a “variable universal life insurance policy” (i.e., an insurance policy where the payout is determined in part by the performance of certain investments).
  3. Finally, the insurance company forms a new “segregated account” on its books to hold the assets in which your policy is invested. The segregated account insulates your investments from the insurance company’s creditors and any down-side associated with investments held in other segregated accounts.

You’re not subject to US tax on any income or gain from the investments in the segregated account while you hold the policy. On your death, the policy beneficiaries would also receive the assets free of U.S. tax. Additionally, if the policy is structured properly, you can even receive distributions of cash during the term of the policy without paying tax.

So, tax-free asset appreciation and access to cash—what’s not to like?

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Complications . . . and More Complications

Well, here’s what—several complexities and complications. Here’s a sampling:

A Better Way to Invest in Mutual Funds

Offshore life insurance structures are a popular choice for holding assets where the holder cannot otherwise control taxable events. One example is mutual funds—a direct holder of mutual fund shares realizes taxable income every time the fund manager decides to sell an underlying security. Holding that same mutual fund through an offshore life insurance structure either defers that tax liability or eliminates it entirely.

So, there’s still an actual tax shelter that really works for those with the means to take advantage of it and the stomach to weather the initial complications.

Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.

Stewart Patton

I'm Stewart Patton, US tax attorney and expat entrepreneur based in beautiful Belize. Read more about me here, or email me at [email protected] to discuss how I can help.

U.S. Tax Services, P.O Box 2651 Belize City, Belize • Belize tel: (+501) 629-6007 • U.S. VOIP: (312) 675-8571 • Email: [email protected]

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