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Creative Asset Protection Strategies, Inc.

You may have never heard of an Offshore Tax-Deferred Annuity, so we are giving you a general overview of the product in the material below. Keep in mind that offshore tax-deferred annuities have been available for many years. You may be concerned that the annuity is “offshore” and believe that the “offshore” term can cause special problems for you with the IRS, but understand that these annuities operate under the IRS Code and that each insurance company offering these annuities must be approved by the IRS prior to accepting clients. “Offshore” simply means that you have significant opportunities to grow your wealth that are not offered by domestic insurance companies. Keep reading! 

One of the most significant opportunities available today to reduce your income taxes and grow your wealth are tax-deferred annuities. Tax-deferred annuities are not a new product. Your parents probably had some tax-deferred annuities. My parents acquired tax-deferred annuities in the 1960s and 1970s as college professors. Offshore tax-deferred annuities generally operate under the same set of tax rules as do qualified funds (IRAs/401ks, etc.) except that the annuities are funded with after tax dollars. That means that the amount that you contributed is ultimately returned to you tax-free instead of being fully taxable, and generally in the same form as you contributed it – real estate, small business stock, cash, etc. 

Offshore tax-deferred annuities generally operate in similar fashion to domestic tax-deferred annuities with the exception that you are able to deposit non-cash assets into the annuity, able to invest outside of the U.S., able to invest in U.S. real estate, a small business that employs you, and invest in bonds and equities in U.S. markets. In addition, you are able to nominate a qualified investment manager for your investment in the annuity. 

Non-U.S. individuals have significant benefits available to them by investing in these annuities, including the ability to invest in U.S. real estate without the complications of FIRPTA. 

If you could design a financial product that offered the following features,what would you call it?

 Allows you to deposit non-cash assets including real estate and company stock, or options, or warrants, or intellectual property rights, or contractual rights, or ……………………..(ask us).

 Allows you to nominate one or more one or more qualified managers for your cash and non-cash investments.

 Allows you to invest in alternative assets in the US and in other countries, including real estate and including a company which employs you,

 Allows non-US investors to participate and to invest in US real estate without FIRPTA issues or to invest in other US assets or markets.

 Allows for tax-deferred growth.

 Allows you to determine when you make withdrawals, in what amounts and whether the withdrawal is one payment or many or a combination.

 Has no surrender charges for withdrawals.

 Allows you to invest in life insurance plans to produce future tax-free income.

If you could design a financial product that has all of these features, what would you call it?

This product is technically called an:Off-Shore Group Deposit Administration Contract With Separate Account.

We call it an “Offshore Tax-Deferred Annuity.”

The memorandum below is for those who want more in-depth information about these offshore arrangements. If you need additional information, please contact us.

Off-Shore Group Deposit Administration Contract With Separate Account

THE CONCEPT

The Group Deposit Administration Contract (“GDA”) is a custom group annuity offered by an off-shore insurance company. GDAs provide sophisticated investors with a significant wealth preservation opportunities. Off-shore GDAs provide superior benefits including: flexibility of funding; control; a variety of investments; and, asset protection. GDAs provide for the long-term accumulation of contributions into an account segregated from the rest of the issuing Insurance Company’s accounts. Under this arrangement, funds deposited with the insurer are not allocated for individual annuities but, instead, provide a pool that the insurer invests according to the direction of the annuitant. The annuitant may choose investments providing a fixed rate, equity investments with variable rates, life insurance or a combination. The GDA, like all annuities can be accessed in a single payment or, as this memo assumes, can be accessed over a period of years.

BENEFITS OF OFF-SHORE GDAS

Properly structured GDA contacts offer a variety of benefits. These include: flexibility of funding; asset protection; investment flexibility; and, tax advantages. 

Flexibility of Funding and Investment:  Off-shore GDA contracts are more flexible than their commercial U.S. based counterparts. The annuitant can fund the GDA through a variety of means including but not limited to: cash; and, “in kind” contributions such as shares of a company, bonds and notes. N.B., the off-shore insurance carrier may issue “in kind” repayment. The annuitant can nominate his own investment advisor and invest in opportunities that are not available to U.S. based commercial annuities. For

example, the annuitant can purchase a separate life insurance policy, typically an indexed universal policy, and have the GDA pay the premiums as an investment. Additional foreign investments not accessible to U.S. based insurers are also available for consideration.

Favorable Tax Treatment: The Internal Revenue Code (IRC) provides numerous incentives for individuals to save for retirement using annuities. When annuitants purchase a GDA contract using after-tax dollars (known as a non-qualified annuity), investment returns in the annuity accumulate on a tax-deferred basis until funds are withdrawn. Additionally, transfers between investment options within a variable annuity may not trigger taxation, nor do certain instances of replacing one annuity with another. The tax-deferred treatment of the inside build-up within an annuity may amount to a significant sum over a period of many years, often resulting in a higher level of savings available at retirement compared to a similar investment that incurs income taxation every year. Section 72 of the IRC addresses taxation of annuities. When an annuitant begins receiving income from an annuity, distributions taken in excess of the amount invested may be subject to taxation at the annuitant’s ordinary income tax rate. The methods of taxation differ by the way money is withdrawn from the annuity. The most common scenarios are for annuitants to make withdrawals from the accumulated value while the contract is in force, or to surrender the entire contract altogether. For most GDA contracts, the tax rule on withdrawals is “interest and earnings first,” meaning that interest and earnings are considered withdrawn first for federal income tax purposes. Withdrawals are taxed until all interest and earnings are withdrawn; the principal then can be withdrawn without tax. The “interest and earnings first” rule is intended to encourage the use of GDA contracts for long-term savings and retirement planning. This is reflected in the IRC’s directives that the advantage of tax deferral should not be accompanied by the ability to withdraw principal first, with no tax payable until all principal is withdrawn. 

Another tax benefit may be realized when annuitants convert the accumulated value of the annuity to an income stream for the life of the payee or a specified period. (Note, that this differs from withdrawals made via living benefit guarantees, these are considered withdrawals, not annuity payouts, as the contract is not converted under this circumstance.) For purposes of this memo, the basic rule for annuity payouts (as distinguished from withdrawals or other non-periodic payments) is that the money an annuitant invests in the contract is returned in equal non-taxable installments over the payment period. This quantity, called the exclusion amount, is determined by using actuarial factors including life expectancies and total expected payouts from the annuity. The remainder of the amount received each year is treated as the earnings on the owner’s premiums and likely will be included in income. The total amount that is received without taxes can never exceed the premiums the annuitant paid for the contract. Therefore, owners of annuitized contracts may realize two tax benefits: tax deferral of gains during the accumulation period; and, exclusion of tax on a portion of payments during the payout period. 

Asset Protection:  A properly structured off-shore annuity offers three significant lines of defense: (1) the off-shore jurisdiction; (2) many individual U.S. States offer their residents’ annuities statutory protection; and, (3) assets of the obligor cannot be accessed by creditors of the individual.  

GDA Contract Implementation.  Establishment of a GDA contract: Once the annuitant transfers assets to the obligor, the obligor manages the assets at the direction of the investment advisor. 

Administration and Investment Management:  Custom GDAs provide the flexibility necessary to achieve the annuitant's goals. Premiums. Investment gains and losses and credited interest are allocated to an account that is separate and apart from the insurance carrier’s general account. This account is called a “Separate Account” and the assets allocated to it are only those of the contract owner(s). Under law, the Separate Account assets must be segregated from the company’s general account, and its income, gains or losses—whether realized or not—must be credited to or charged against only the amounts placed in the separate account, regardless of any other income, gains and losses from any other business or activity of the insurance carrier. Consequently, these Separate Account assets may not be used to pay liabilities arising out of other business the insurance carrier may conduct, and are insulated from any creditors of the issuer. 

The annuitant in a GDA contract arrangement may not act as the trustee or manage assets directly for the obligor, however many GDA issuers allow the annuitant to nominate a qualified Investment Manager of their choice. Non-cash assets must be valued at FMV when contributed to the annuity and must be appropriately valued each year. 

Offered through: Shiloh Advisors LLC                         Wilmington, DE USA                         david@shilohadvisorsllc.com

                         305-822-8161


Category: Annuity

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