subject: Asset Protection and Tax-Free Wealth Building Via a Life Insurance Dynasty Trust [print this page] In these times of eroding property rights, punitive tax rates, and financial insecurity, a U.S. taxpayer can use an irrevocable life insurance trust to protect trust property against creditors, legally avoid U.S. taxes, and also enjoy trust assets. Generally, a carefully-designed irrevocable life-insurance dynasty trust (or generation skipping transfer (GST) trust) provides tax-free growth of policy assets, and proceeds of the life insurance policy are paid to the trust free of income and estate taxes.
Previously, it was uncertain whether the person who settled and funded a trust could also be a trust beneficiary without loss of estate-tax advantages. The IRS recently provided some clarity and reassurance to US taxpayers who want to be beneficiaries of a self-settled, irrevocable, discretionary asset-protection trust. In Private Letter Ruling (PLR) 200944002, the IRS ruled that assets in an asset protection trust were not includable in the grantor's gross estate even though the grantor was a beneficiary of the trust.
Based on the new IRS ruling, the grantor (or settlor) of the trust may be a discretionary beneficiary (i.e., subject to the discretion of the trustee), but trust assets will not be taxed in his estate when he dies. In other words, a U.S. taxpayer can fund an irrevocable trust that buys a life insurance policy insuring his life, the policy assets can grow tax-free, he can benefit from trust property during his lifetime, and when he dies, the insurance policy proceeds are paid to the trust free of income and estate taxes.
In the past, some U.S. taxpayers used secret offshore companies and numbered Swiss bank accounts to avoid taxes. Now, similar benefits can be achieved in complete compliance with U.S. tax laws, and with the peace of mind that everything is completely legal.
An offshore trust holding a Swiss (or other offshore) life insurance policy provides virtually unassailable asset protection, in addition to tax-free growth and tax-free wealth transfer in the family legacy trust a very nice solution to the problem of high taxes and precarious property rights. A Swiss annuity can provide some of the same benefits.
Warning & Disclaimer: This is not legal advice.
2010 Thomas Swenson
Asset Protection and Tax-Free Wealth Building Via a Life Insurance Dynasty Trust
By: Thomas Swenson, Esq.
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