Most of you know by now that I grew up in the Panama Canal Zone which no longer exists as of 1999. In that respect, the transition left me as a man without a country. My father (of blessed memory) when referring to kids raised in the Canal Zone, said that it was the only country that we ever knew. I have previously posted that Zonians celebrate this connection to the Canal Zone with a reunion every year. This may be the only country that we knew growing up, but it does not mean that we weren't patriotic Americans.
This patriotism is no better demonstrated than military service. I have surmised in my quirky ways that the Canal Zone high schools - Balboa High School on the Pacific Ocean side of the Canal Zone and Cristobal High School on the Atlantic Ocean side of the Canal Zone - sent the largest numbers of students to the U.S. service academies of any American high school on the Planet. I went to Balboa High School up to the 10th grade before I transferred to Culver Military Academy. My football team had five students who went to various service academies. I estimate the number of service academy appointments as 10-15 in the time period 1976-1978. Not bad!
Recently I wrote about Family Owned Life Insurance™ (or Family Office Life Insurance™) or FOLI™ as a planning solution for ultra-high net worth investors to structure investments tax efficiently on an inter-generational basis. The benefits are quite simple and compelling. Investment assets accumulate tax-free and may be distributed to beneficiaries tax-free. Policy death benefits can be paid to generation skipping trusts income and estate tax-free.
This segment focuses on a companion solution to FOLI™ called FOLA™ or Family Office Life Annuity™. The solution utilizes a private placement group variable deferred annuity which provides for tax deferral. I have written previously about the concept of a Dynasty Annuity, e.g., a deferred annuity that could allow a family trust to accumulate investment income on a tax deferred basis for generations.
The concept is relatively straight-forward. A multi-generational trust may own a deferred annuity without violating the tax rule regarding ownership by a non-natural person, i.e., a trust. Since the trust has individual beneficiaries, the non-natural person rule of IRC Sec 72(u) is not violated, allowing for tax deferral within the Trust.
The FOLA™ annuity is a group annuity issued to the Trust. The FOLA™ has a large group of annuitants (measuring lives). The annuitants do not have any rights under the Policy. In my view, the insurable interest rules of life insurance do not apply to annuities. In a trust-owned annuity, the death of an annuitant triggers the need for a distribution of the annuity under IRC Sec 72(s). If a policy had ten annuitants, the death of a single annuitant would necessitate the need to distribute ten percent of the account value in a lump sum within five years of the annuitant's death or over the life expectancy of the oldest beneficiary of the Trust.
The Policy allows for customized investment options. The combination of institutional policy pricing, and investment flexibility and tax deferral across the lives of a large number of annuitants, provides for favorable tax deferral for many decades.
Summary
To the best of my knowledge, the ultra-high net worth are still motivated by low tax rates and tax deferral. While it can be argued that life insurance under tax rules provides the best tax treatment, variable deferred annuities are no "slouch" when it comes to tax benefits. FOLA™ provides a tax structuring set up for decades of tax deferral within Dynasty Trusts.
Want to learn more? Call me!
Gerry R. Nowotny, Esq.