Dual-citizen inheritance using PPLI and FLP
Here is a case study based on an American couple who have enjoyed a successful life in London and plan to retire in Florida. This case study demonstrates a US UK wealth protection and wealth transfer opportunity to benefit their 3 dual-citizen children.
Scenario
John, aged 61 and Susan, aged 59 are US citizens. They have been living in the UK for 20 years. John is a private equity partner. They have 3 adult children aged 23, 26 and 28. The eldest 2 are living in the US and the youngest is living in the UK. The couple plan to retire to Naples, Florida in 4 years’ time. The couple have accumulated a joint net worth of USD 50m from their business success in London and they would like to consider making gifts to the 3 adult children either via a trust or other tax-efficient entity.
The challenge
As US citizens, John and Susan face estate and gift tax exposure on worldwide assets regardless of residence. As UK residents, outright gifts trigger the UK’s 7-year Potentially Exempt Transfer, PET clock. Given John’s private equity background, he would like a structure capable of holding both liquid and illiquid investments. They have 4 years to plan before they move back to the US.
Tax efficient structuring options for movers between the UK and US
The couple have consulted with their lawyer and are considering planning structures to remove gifts from their US and UK taxable estates while providing a tax efficient investment plan for their children over their lifetimes. John and Susan have taken advice from both their US and UK tax advisors and have decided to set up a Family Limited Partnership [FLP]. John will be the General Partner of the FLP and his 3 children will be Limited Partners. Gifts will be made to the FLP to benefit the adult children.
Recommended action
Vie International has assessed John as a professional client and in the US, he would be classed as an accredited investor. This qualifies him as a suitable client for a Private Placement Life Insurance [PPLI] policy. Through Vie’s affiliation with the
M Financial Group in the US, a Magnastar PPLI policy on John’s life will be purchased with 3 annual premiums totalling USD 10m. This type of policy design provides the client with both the protection of life insurance as well as US tax-deferred growth of the premiums. The premiums will be invested into a series of Insurance Dedicated Funds [IDFs] with a blend of both liquid (public) and illiquid (private) investments.
The US UK cross border tax consequences
- For UK purposes, the gift into the FLP will be classed as a Potentially Exempt Transfer [PET] and requires that John live for 7 years in order to be classed as a completed gift.
- For US purposes, John’s US UK accountants will complete a gift tax return and use USD 10m of his current USD 15m US gift and estate tax exemption.
This results in John, as the General Partner of the FLP, retaining control over the assets in the FLP that will benefit the children.
- The USD 30m+ death benefit on the policy would be both income and estate tax free, excluding the General Partner share, should John pass away as a US resident in 4 years’ time. The PPLI policy will provide withdrawal and loan facilities over time for the children should they wish to use these features.
This is specialist cross-border financial planning, requiring the expertise and knowledge of both the UK and US taxation systems.
Contact Vie International today if you are interested in learning whether this planning solution may be suitable for your circumstances.