Exchange of Information:
China committed to the Automatic Exchange Of Information (AEOI) and to the Common Reporting Standard (CRS); it aims at exchanging information as of September 2018. CRS is conceived to identify and exchange all stakeholders in all wealth planning structures and entities as of 1 January 2017.
The only, potentially relevant, structures that are formally exempt are life policies with a Zero Cash Value (ZCV); including certain Term Life Insurances. All other structures and entities, including Private Placement Life Insurance (PPLI), are or will be in the scope of CRS. Well-advised clients will want to have their house in order before the end of 2016.
Asset protection:
If the application of CRS is unavoidable, one must be protected against the consequences of CRS. Only the strongest possible asset and investor protection regimes are good enough to protect the Chinese client against unjustified claims from business partners, competitors, (ex)spouses, family members, aggressive officials and others.
Therefore, more and more well-informed Chinese investors, with assets abroad, are selecting Private Placement Life Insurance as a wealth planning structure not only for asset and investor protection but also for tax and estate planning and/or as a private holding structure.
How does PPLI work?
The client can act as policyholder directly or indirectly through a company set up by his trust. The policyholder contributes the assets that he or she wants to protect as a one-off premium payment, in cash or in kind, to a bespoke investment fund created by the life insurer. The life insurer opens a dedicated account at a custodian bank for the underlying assets of the policy.
The policyholder selects an investment strategy and nominates an investment manager. The life company formally appoints the investment manager. Usually, the custodian bank and the appointed investment manager are the same bank that held the investment portfolio before the premium transfer. This internal investment fund, holding the client’s assets, is exclusively linked to the policyholder’s life policy. The value of the PPLI policy is equal at all times to that of the underlying internal investment fund.
The life insurer has now become the Ultimate Beneficial Owner (UBO) of the underlying assets. In return for the premium payment, the policyholder has a “claim” on the life insurer for the value of the underlying investment fund. He can withdraw and/or surrender at any time during his life time, although surrender penalties may be applicable during an initial period of several years. Following the initial period, withdrawals or surrenders can be made penalty-free.
There is general consensus in the doctrine that as long as the underlying assets are held by the life company, they can’t be seized by creditors of the policyholder or other claimants unless the assets were placed in the life policy during the suspected period prior to the policyholder’s bankruptcy.
Relevant jurisdictions:
Luxembourg, Liechtenstein, Bermuda, the Bahamas and IoM all have strong asset protection laws and jurisprudence to enforce them. The differences are more on the investor protection side. The regulator in Luxembourg insists on the use of approved custodian banks in the EEA and Switzerland; the BoS is the exception. The regulator in Liechtenstein doesn’t even require a custodian bank to hold the underlying assets. Bermuda is very flexible on custody and relies on the life companies to work out a custodian relationship with solid banks anywhere in the world, including Hong Kong. Expert guidance by an independent intermediator, not hindered by conflict of interest, may be required to get a good offer from suitable life companies.
Succession planning:
The policyholder can appoint freely the beneficiaries and can change them at any time through a simple registered letter addressed to the life company. The beneficiaries don’t need to be informed of that. No probate; upon the death of the assured, or the last of the lives assured, the NAV of the PPLI is paid out in full to appointed beneficiaries.
Substance:
The policyholder can nominate the discretionary investment manager. The life company will appoint him officially and will supervise whether the investment manager respects the investment strategy signed off by the policyholder. When the assets are held by a bank or an External Asset Manager, the policyholder cannot interfere with the discretionary investment management.
Since life policies have traditionally a long term horizon, surrender penalties will be in place during an initial phase of 5 years to underline this long term intent. Since life policies usually have a death claim, an additional death cover of 5% is mandatory and the annual premium for that will be borne by the life policy.
Zero Cash Value Life Policies:
Zero Cash Value (ZCV) life policies like certain Term Policies or certain Whole of Life policies with a zero cash value for the client, are explicitly excluded from the scope of the CRS. The policyholder cannot withdraw, pledge or take an advance. The benefit of the life policy will go to the appointed beneficiary at death of the life assured but leaves no cash value for the client during his life time. Even if the policyholder terminates his contract voluntary, or is enforced by any third party to do so, he cannot access the assets in the ZCV life policy.
ZCV life policies are the ultimate asset protection tool; the client can change the beneficiaries during his lifetime but the assets left his estate irrevocably. This is exactly the reason why ZCV structures could be of interest as a partial solution for certain irreversible succession planning objectives.
Level Term Life Insurances:
A Level Term Life Insurance provides coverage at a fixed annual premium for a defined period of time, such as 10, 20 or 30 years. If the client dies within the term, the death benefit will be paid to the appointed beneficiary. But the policy has ZVC for the client if he survives the term. The death cover can be very significant and the annual, fixed premiums are extremely competitive. Their primary use is to provide coverage of financial responsibilities for the insured or his beneficiaries, such as providing immediate liquidity for the surviving spouse and other beneficiaries in anticipation of the liquidation of the business cluster of the insured. Probably an excellent solution for certain individuals but definitely not a general applicable solution.
