Offshore Investment Bonds and Foreign Life Insurance for US Taxpayers

Offshore investment bonds and foreign life insurance wrappers should be reviewed very carefully before being used by a US taxpayer.

They are not automatically unsuitable in every case, but they can create serious complexity.

A review should usually consider:

• whether the policyholder is a US citizen
• whether the policyholder is a green card holder
• whether the policyholder is a US tax resident
• whether the policy is a foreign life insurance policy
• whether the policy is an annuity contract
• whether the policy has cash surrender value
• whether the policy is investment-linked
• whether underlying funds may create PFIC issues
• whether Form 8621 may be relevant
• whether Form 8938 may be relevant
• whether FBAR reporting may be relevant
• whether foreign insurance excise tax may apply
• whether withdrawals are taxable
• whether surrender creates tax consequences
• whether policy loans create issues
• whether local tax treatment differs from US tax treatment
• whether the product charges are reasonable
• whether surrender charges apply
• whether adviser remuneration is transparent
• whether the structure is liquid enough
• whether beneficiaries are up to date
• whether the client may return to the United States later

IRS guidance on Form 8938 says foreign-issued life insurance or annuity contracts with cash-surrender value can be specified foreign financial assets where relevant thresholds are met.

IRS Form 8621 guidance may also be relevant where underlying investments create PFIC exposure.

That is why these structures need to be reviewed before they are treated as ordinary investments.

Offshore bonds are often marketed to expatriates because they may provide tax deferral, administrative convenience or estate planning flexibility in some jurisdictions.

But US taxpayers need a different analysis.

A structure that appears useful for a non-US person may be inefficient, expensive or reporting-heavy for a US person.

Potential issues include:

• the policy may be foreign-issued
• the policy may have cash surrender value
• the policy may be investment-linked
• the underlying investments may be PFICs
• Form 8621 may be needed
• Form 8938 may be relevant
• FBAR reporting may be relevant
• premium payments may need review
• foreign insurance excise tax may need review
• surrender may trigger tax or charges
• withdrawals may not be treated as expected
• policy loans may create unexpected issues
• product charges may be high
• adviser remuneration may not be transparent
• investment choice may be limited
• liquidity may be poor
• the policy may not be portable if the client moves country
• the structure may not be suitable if the client later returns to the United States

The issue is not that every foreign policy is automatically wrong.

The issue is that a US taxpayer should not buy or keep one without understanding the US position.

For many US-connected clients, the biggest risk is not the headline product.

It is the combination of tax complexity, reporting obligations, unclear charges, surrender penalties, unsuitable underlying investments and poor portability.

This page is for general information only and does not constitute personalised financial, tax, legal, investment, insurance, pension transfer, retirement, estate planning, US tax, PFIC, Form 8621, Form 8938, FBAR, FATCA, Form 720, foreign insurance excise tax or currency advice.

Offshore investment bonds, portfolio bonds, foreign life insurance wrappers, foreign annuity contracts, policy withdrawals, policy loans, surrenders, premium payments, foreign insurance excise tax, Form 720, Form 8938, FBAR, FATCA, PFICs, Form 8621, tax reporting, investment funds, charges, surrender penalties, liquidity, beneficiaries, estate planning, currency and future residence depend on personal circumstances and may change.

US tax advice should be taken from a suitably qualified US tax adviser or CPA. Local tax, legal and insurance advice should also be taken where relevant.

Financial planning should be coordinated with legal, tax, insurance, investment, pension and estate planning advice where appropriate.

Do not buy, surrender, restructure or stop funding an offshore investment bond or foreign insurance wrapper based only on general information.

Investing involves risk. Investment values can fall as well as rise, and you may get back less than you invest.

Currency movements can affect the value of policies, premiums, withdrawals, surrenders, tax liabilities and future spending.