Beating the tax man

Looking for ways to avoid estate duty? We speak to an innovator in the field of life insurance.

As governments around the world run increasingly large budget deficits, so they are stepping up their efforts in tax collection. Asia is not immune from this as traditionally low-tax jurisdictions move to raise more money. The beady eyes of the tax collectors are increasingly falling on the assets of wealthy individuals who often get stung with large estate duties.

However, solutions to this issue do exist. We talk to John Stone and Paul Rust of Lombard International Assurance, a Luxembourg-based life insurance company that offers an innovation called privatbancassurance. Founded in 1991 by Stone, Lombard has been building up business in Europe over last twelve years. In the last two or three years the business has come to Asia and Rust was brought on board a year ago to spearhead the development.

What is Privatbancassurance?

Stone: It doesn't really resemble any form of insurance you have ever seen before. What we are doing is using life insurance as an estate and tax planning structure. Key elements are that the private banker keeps control of the assets and remains the asset manager. But in some countries such as Japan and Taiwan, life insurance policies are exempt from estate duty. So in those countries where estate duty is 50%, if a client has his assets in a life insurance policy, then on his death his children will inherit estate duty free assets. It is a simple as that.

However most private bankers don't like life insurance as it means they lose control of the assets. Secondly they tend to regard life insurance as being a retail product, not suitable for high net worth clients. However our business is purely focused on clients with a net worth of US$1 million, but most of them have more than $5 million. I presume it is inevitable that the wealthier the client, the more concerned they will be with estate duties.

In some ways what we are doing is far more similar to providing a trust than a life insurance policy and we only provide whatever risk cover is required by the regulations in each country. So for example if a client has $20 million of assets and holds $5 million of that in a Lombard privatbancassurance arrangement, then on death the client's family receives those assets free of estate duty.

Is this catching on in Asia?

Yes. One of the reasons for its growing popularity is that traditional estate planning solutions are working less and less effectively. For example, tax authorities are increasingly just looking straight through a trust or foundation and for all practical purposes it doesn't achieve very much. Whereas it is quite clear within the law that life insurance policies are exempt from estate duty. It is a clear and transparent solution. It is not a product for everyone. It is a tailor made solution, which we are offering through a selected number of private banking clients of ours.

How do you get the assets such as, for instance, listed shares in a family business, into the life insurance policy? Surely the policy is comprised of the premiums paid in?

The client simply transfers those assets to our ownership, so we become the legal owner of those shares. What the client then has is a policy, which has as its assets, those shares that he transferred to us. When it comes to paying out at the other end, we either encash the assets and write a cheque to the beneficiaries. Or we can just transfer the assets back in specie.

That must require a lot of trust on the behalf of your clients that you will still be around when they die?

The answer to that question lies in the investor protection regime that protects those assets. Most of our business is done through our Luxembourg company, although we do have another company in Guernsey. Under Luxembourg law there is a requirement to protect those assets and the legislation gives the client 100% protection. Under the law we are required to appoint a custodian, who will control those assets.

Traditionally tax was not a very long conversation between private bankers and their Asian clients. Do you get the sense that the tax authorities in Asia are getting more stringent towards wealthy individuals?

Rust: Definitely. There are stories around that in Taiwan and the Philippines there are officers from the IRS training local officers in tax collection. In Taiwan, we have seen the Ministry of Finance more able to go back and track remittances out of the country, which they were not able to do before. There are systems now where commercial banks' systems interface with central banks systems so they can see money coming in and out of countries. We are only at the beginning of it. The IMF and others are starting to tie aid to places such as Indonesia and the Philippines on the basis of their tax collection.

Stone: It is a worldwide phenomenon. We have had the QI in the US and the EU Savings Directive. Its inevitable that as government's need to raise more tax revenues, then regimes that in the past were quite relaxed are becoming much tougher with much higher levels of tax compliance. So tax and succession planning is becoming much more important for private bankers in this region.