Dealing with Declining Geopolitical, Economic, Tax, and Financial Conditions
For many years, there have been concerns about the future of the US dollar and other fiat currencies, economic recessions, stock market crashes, the burden of US national debt, and the decline of US global power. These concerns are becoming more tangible now, despite the attempts of mainstream media to dismiss them.
As of July 2023, the US national debt is approaching $33 trillion, and the projected unfunded US debt liabilities are around $192 trillion. In 2008, the national debt was “only” $10 trillion. Paying interest on the national debt has become the largest budget expenditure for the US. Over 121 countries have started efforts to reduce their reliance on the US dollar by incorporating gold into their alternative assets. This trend is impacting the global currency reserve landscape, with countries like Russia, Iran, Venezuela, and many developed economies in Asia leading the way. (Source: “56 countries including Japan, Israel, etc. de-dollarize, US media: Japan is dumping US debt with lightning speed”, iMedia, 26.July.2023, at min.news/en/economy/).
Current US income tax rates are historically low, while inflation remains high. The US Federal Reserve continues to raise its lending rates to control inflation. Given the high level of debt and leverage in the economy, as well as overvalued equity markets, many experts predict a severe market correction and an economic recession. It is uncertain whether future tax rates will increase or if the US government will resort to inflating/devaluing the currency to address the national debt and declining tax revenues.
The decline of US global power was inevitable, following the pattern of past empires. However, the US government’s reckless behavior, exemplified by its proxy war against Russia and provocations towards China, has accelerated this decline. Meanwhile, the US is grappling with rising violent crime and homelessness in its cities, an uncontrolled southern border, an ongoing fentanyl crisis, weaponized government agencies, a divisive woke culture, and a president and Congress plagued by corruption and incompetence.
All these factors point to significant risks to wealth and well-being in the US.
Is there a way to mitigate these risks? Yes, by moving some assets out of the US and into an offshore trust, specifically an offshore irrevocable life insurance trust (ILIT). The ILIT can use these assets to acquire offshore private placement life insurance (PPLI). Even individuals or families with a net worth of $2 million to $5 million can financially afford an ILIT-PPLI structure.
The ILIT-PPLI structure offers tax-free growth of wealth, tax-free income for trust beneficiaries for generations, asset protection against creditors, and the management of family wealth and legacy.
In terms of asset protection, the settlor (or grantor) of the ILIT, who forms and funds the trust, allocates portions of their gift and estate tax exemption and generation skipping transfer tax (GSTT) exemption to cover the “completed gift” to the trust. As a result, estate and GST taxes will never be imposed on distributions to trust beneficiaries. The ILIT can have both a US domestic trustee and a foreign trustee. This allows the trust to be treated as a domestic trust for IRS tax purposes, while the assets are located outside the US. If legal issues arise, the US trustee can be replaced by the foreign trustee, who operates outside US jurisdiction.
PPLI is designed to minimize the death benefit and maximize the cash value growth of the policy. Similar to other life insurance policies under the US tax code (IRC § 7702), there are no taxes paid on investment growth of assets held in a PPLI policy. This means that assets within the policy grow tax-free, and distributions to trust beneficiaries are also tax-free. Since the ILIT owns the PPLI policy, distributions to beneficiaries are exempt from estate and GST taxes. As a result, wealth can grow and be distributed to beneficiaries completely tax-free, indefinitely.
During the insured’s lifetime, tax-free policy loans can be taken from the cash value and distributed to beneficiaries. Upon the insured’s death, part of the death benefit can be used to purchase a new policy insuring the life of a younger beneficiary, enabling the cycle to continue as long as desired.
The ILIT-PPLI structure not only moves assets out of the US but also offers advantages over domestic PPLI. Foreign-based PPLI typically has lower minimum premium commitments (usually around $1 million), lower start-up fees, and lower carrying costs compared to domestic PPLI. Domestic PPLI, on the other hand, requires a minimum premium commitment of $5 million or more (only in cash), has higher fees, and is subject to state-imposed investment restrictions. Although PPLI is exposed to market risks due to its investments, these risks can be effectively managed through conservative and diversified funds.
An alternative to PPLI is a foreign deferred variable annuity (DVA).
Copyright © 2023 Thomas Swenson
Disclaimer: This information is intended for educational purposes only.
Circular 230 Disclosure: As provided for in Treasury regulations, any advice related to federal taxes mentioned in this article (including attachments and links) is not intended or written to be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter to another party.
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