Advance Tax Structuring and Asset Protection Strategies with Insurance for Family Offices and HNWI
"... even if you hate insurance, there is almost no way to get to the same place that some of these strategies and structures can arrive at."
Here are 4 contracts to dial into a risk-averse position for Family Offices, under any environment but especially during COVID 19.
- Legal Structures,
- INSURANCE,
- Start Over Fund,
- Family Protocols.
My personal favorite is Insurance, in all its lines Life, and P&C. I'll begin with and my absolute favorite: Life insurance!!!
The Fundamental benefit is that the asset if it is not a MEC you have liquidity when borrowing against your policy and the face value of the policy stays and you can sell that for a value in the market and get cash out of it if you don’t want to wait until you die, that are two ways to get liquid.
Every State with LI has a complete exception from Bankruptcy many States exempt it which means that the creditors can take it, besides the US Government; other states will exempt it if the beneficiaries are the wife or children or both - so it is limited, another States will only exempt $2M or a portion but it is whole or partially exempt in almost every state territory and many foreign countries.
For that reason you have an asset that creditors cannot get without difficulty, Courts have a bias against awarding life insurance because they know it is to be leftover for the beneficiaries that they are ok. And then you have liquidity and the ability to have the assets grow income tax-free. All in all an awful significant pile of long term wealth management benefits that are hard to find in any structure!
Later on to that, several very sophisticated structures that make it even more impactful. One is a Private Placement Policies. These policies are institutional priced policies. Think of having your own captive life insurance company - buy your own policy, keep your own premium, manage your own money, wow… A pretty good deal!
Before these policies had $10M - 20M minimums, Now these policies are retailed and are priced for millions instead of tens of millions, and they are priced institutionally so the commissions are very small. It is more an asset under management fees and lesser surrender charges. Insurance companies like it because they are sticky and not likely to be terminated and these policies do a couple of things:
You are able to designate an investment advisor or you can pick from a series of funds, or in some cases, you can put any fund, you can put even your own fund depending if it is national or international and who the insurance company is. So they are very impactful, very cost-effective and don’t have a lot of drag in the policy.
So for example, if you put in $5M the first year of premium, in a typical domestic policy you have no cash value in the first year, but with this policy, you may have $5M of the cash value in the first year, so they are different and worth looking at if you got the ability to get positive underwriting. Where you are on the tables makes a difference, and for that reason, many people will put the strategy in place with what we call the strategy “Rent a Body” they will use children or grandchildren as the insured in order to get more cost-effective policies and build wealth. There are a number of multi-billionaire Families that have a private placement policy in every living member of the family.
The second strategy is Split Dollar and Generational Split-Dollar it is a way to fabricate the policy with partial ownership, let the highest appreciation go to your descendants, and if you die young you get a windfall, and if you don’t you get a decent rate of return that was TAX SHELTERED and there is liquidity available.
Finally, Premium Financing is a way to LEVERAGE those policies and not put any personal cash. Example: one client had a $25M policy for about 18 years, never laid out a dime, borrow all the money from a major bank that you’d all know, and at the end of the18th year we starting to get no longer non-cost effective and he has plenty of assets at this point, we terminated the policy and as a net result, we get approximately $350k dollars. Our cash value exceeded the debt by $350k dollars and he actually made money and had a massive amount of FREE insurance for a long period of time without ever paying any cash.
And all these layers can be placed on top of each other, so you can have a premium financed private placement policy owned under a generational split-dollar account. It is complicated but it can be done, and these things are worth looking at even if you hate insurance, there is almost no way to get to the same place that some of these strategies and structures can arrive at.
These strategies usually come from Tax Consultants and Tax Attorney because agents do not make a lot of commission and they are a ton of work.
Now similarly to Life insurance, the additional focus is on P&C insurance to hedge and mitigate risk.
The average family office with over $100M has $30M in insurance. Meanwhile, some families have $50M some families have $5M.
P&C insurance, umbrella policies, special risk policies, captive insurance companies, syndicates, P&C Captives, etc.
P&C policies on businesses, Real Estate, and personal residences. In particular, most people's personal residence the structure may be over-insured or underinsured, but the personal property is on the same boat and maybe even more egregious. So as a result of that the high-end insurance advisors will du an audit examination. Most insurance companies, without any additional information from you, will insure your personal property for half the value of a home, so if you’re in a $4M home you may have $2M of property or you may have $10M worth of property. Some homes have yards of $20M and the home of the home is for $5M, so they had different schedules and riders for the yard. This analysis can be very detailed.
So if you have questions about the value of your personal property you can have priced every piece of your personal property. It is surprising when you discover the real value of your personal property.
Furthermore, there are many other types of insurance for your business and personal activities and properties - for less money and more customized.
Dialing up the level of care and diligence is part of the deal and one of those methodologies is your own captive insurance company. So you can have a single employer captive and group captive, an agency captive or an association captive; and I would explore all the above
The benefit of the captive is that you would buy insurance that you don’t have or insurance that you want more customization or insurance that is expensive or better insurance. So among the Family Offices, the result is that they get better insurance for the same or less money, and the policies they tend to be more customized. With the captive, what happens is that the experience is good, which means the pool is profitable, you benefit. In effect, you get a dividend of your own good experience which motivates you to be more careful and pay attention to your business and mitigate risks.
The net effect is that you get an injection in the way in; you get revenue down the road, partially deferred or perhaps if you do it internationally long term deferral; and it is not only a positive tax strategy but the business side of it is you got more impactful insurance and you can benefit from your own positive claims experience; so it is a for-profit enterprise - and all the 4 strategies are worth looking at. So it is pretty much a business institutional type strategy because that is what the Family Office market is; it is taking things that are appropriate for Fortune 500 companies and huge investment banks and bringing them down to the level when it makes sense.
Families have had property and casualty captive for decades.
Finally, there are many others to consider for risk management, for example, the huge risk of businesses underinsured. It is an opportunity to get that look at - many families with co-investing and syndicate deals are highly exposed among others.
Always relevant, and now crucial and timely - get your tax and estate strategies set up, review, and structure.
Interview from Angelo Robles with Thomas J. Handler J.D. P.C. Partner, Handler Thayer LLP Global Family Office Tax Structures and Asset Protection Planning