Laws in various parts of the world provide that cash value and proceeds of life insurance and annuity contracts issued in such jurisdictions are protected from creditors of the owner of the contract. Among the more protective are laws of several U.S. states, such as Michigan, Illinois, Florida, and Texas, and European jurisdictions of Switzerland, Austria and Liechtenstein. Of all these, the extensive creditor protection provided by Swiss annuities offers the greatest attraction to the average client.
Under Swiss law, life insurance policies recognized by the government agency overseeing such products are protected against debt collection procedures brought against the policy owner and will not be part of the policy owner’s bankruptcy estate, even when a foreign judgment or court order expressly directs the seizure of such policy.
For example, if a U.S. or U.K. bankruptcy court finds that a Swiss annuity contract owned by the debtor was a part of the debtor’s estate and issued a finding to that effect, with few exceptions Swiss law would prohibit a Swiss court from issuing an order to transfer or liquidate the Swiss annuity in recognition of the foreign bankruptcy court order. Further, Swiss law dictates that, as to any matters between the owner, foreign or domestic of a Swiss insurance contract and the issuing Swiss company, the law of the domicile of the issuing Swiss company shall apply.
Dependant upon beneficiary designation: Statutory protection of Swiss annuities from creditors of the owner is dependant solely on designation of beneficiaries of the policy and whether designation is revocable/irrevocable by the owner. If the designation is revocable, protection is granted only where the spouse and/or descendants of the owner are named as beneficiaries. In this situation, an individual would enjoy the protection during a creditor’s attack, and if the matter was settled, if he wanted to he could later revoke the designation and liquidate the policy. In the event of bankruptcy Swiss law provides that ownership of the contract is automatically transferred to the protected beneficiaries. Thereby, on declaring of bankruptcy of the debtor/owner of the Swiss Annuity, the debtor no longer owns the contract by "operation of law", and any order or instructions from the debtor or on his behalf (including a court order), would be ineffective.
Irrevocable designation: Should the owner desire protection but wants to name an entity or someone other than his/her spouse or descendants as beneficiaries, he/she must make the beneficiary designation irrevocable. A beneficiary designation is made irrevocable by the owner executing and delivering to the insurance company a written waiver of his right to revoke the designation of beneficiary and by a physical delivery of the policy to the beneficiary. In the event of a foreign attack on a Swiss annuity contract it is expected that a court would order the owner/annuitant to revoke a previous beneficiary designation and name the trustee in bankruptcy as the beneficiary. If the previous beneficiary designation was irrevocable, Swiss law keeps the insurance company from complying with the request under its "anti-duress" provision.
Assigning an estate planning trust as beneficiary: If the beneficiary designation is to be irrevocable, the owner may name his/her estate planning trust as beneficiary with the same creditor protection under Swiss law and with the possibility of additional protection offered by the trust itself. The ability to name a trust as a "third party" beneficiary is important, since a large concern of estate planning practitioners have had to deal with in regard to the use Swiss annuities was, in the case of large annuities and/or annuities purchased by individuals with large estates, designating of spouse and/or children as beneficiaries usually would not be consistent with a sound estate plan. So, although the asset protection aspect of the annuity was attractive, perceived estate planning limitations were a hindrance. But an "entity" can be named as irrevocable beneficiary of a Swiss annuity so that, upon the annuitant’s death, the estate planning concerns could be eliminated by naming the individual’s estate planning trust as the irrevocable beneficiary of the annuity contract. In such a case, it would be important that the trust, as beneficiary, was not revocable by the annuitant.
If an individual has concerns about keeping control over the trust, he/she can name a trust that, although irrevocable, is subject to a reserved special power of appointment held by the individual, or to a power held by another but exercisable only with her consent, to avoid unwanted tax results and to retain a substantial degree of control.
Taxes: When naming an irrevocable trust as the irrevocable beneficiary of the contract, advisors must be aware of tax issues associated with this as imposed by the individual’s domicile jurisdiction. For example, if the individual is a U.S. citizen and names a trust as beneficiary of the contract, the income tax deferral on the inside build-up of the contract funds will be lost unless the trust is a "pass-through"or grantor trust as to the individual. Also, the trust must be drafted so that it continues to be a grantor trust even after the death of the individual.
Fraudulent Conveyance Rules: Almost every jurisdiction around the world has a form of fraudulent conveyance rules allowing creditors of an individual to recover transfers made by the him/her if such transfers were made with the intention of depriving the creditors of a fair chance to collect their just debts. These rules vary greatly from one jurisdiction to another, but the underlying universal concepts include:
a. A period of time within which the transfer may be attacked,
b. The question of whether the transfer rendered the transferor insolvent, and
c. The intent of the transferor in making the transfer.
For purposes of creditor protection offered by the Swiss annuity, protection could be lost if the Swiss fraudulent transfer rules apply, even though an irrevocable, asset protection trust may be the owner/beneficiary. Under Swiss law, if the contract was purchased or the beneficiary designation was made within a year of bankruptcy or seizure, or within a year of the commencement of an action which led to bankruptcy proceedings, or if the purchase of the contract rendered the individual insolvent, then the contract may be vulnerable to attack, overriding the other protective rules.
Keep in mind that the creditor’s action to seize the contract must be brought in a Swiss court and, furthermore, the open period is extended to five years if the individual purchased the contract with the clear intent to prejudice creditors.
It is very difficult for creditors to meet this test. In either case, however, the creditor must prove, in a Swiss court, not only that the policyholder had the requisite intent but also that the beneficiaries had knowledge of such intent.
Attitude of the U.S. Courts: Perhaps there is one more significant benefit to mention. Recently, many courts, especially in the U.S., demonstrated a greater cynicism, if not a prejudice, against debtors placing their assets beyond their own control in foreign asset protection trusts. In a recent case, it was observed that U.S. courts cast a discerning eye at the substantiality of offshore spendthrift trusts in order to find the ‘chink in the armor’." In light of this attitude it could be that purchasing an annuity, which is not nearly as "foreign" or offensive to the courts as offshore trusts, may be regarded as more acceptable by them.
Questions concerning fixed or variable annuities: Swiss insurance companies offer annuity contracts which pay a fixed return on cash value or a return based on the investment performance of funds chosen by the contract owner from a list offered by the company. Therefore, the fixed annuity contains little or no risk (subject, of course, to the financial strength of the issuing company) but offers very limited growth, while the variable annuity carries with it investment risk but offers the potential for considerable growth.
Also, the advisor must remember that the question of fixed or variable annuity could have tax implications based on the law of the owner’s domicile. For example, if a U.S. citizen buys a foreign annuity that is fixed on its return, he/she will lose the income tax deferral, since U.S. tax laws treat the contract as an "original issue discount" security and tax the income each year, even though not received. Accordingly in this case, a variable annuity would be the only logical choice.
Conclusions: A timely purchased Swiss annuity (or one from a jurisdiction with similar laws) can offer significant asset protection, tax and investment benefits and, when combined with a trust, offers considerable long-term estate planning benefits, as well. Having a trust as owner/beneficiary of the contract enhances the asset protection features of the annuity and offers the opportunity to plan for distributions from the annuity through the trust to both the individual and members of his/her family both during the their lifetime and after their death. Additionally, it is far more likely to be accepted by the courts as a reasonable means of protecting investment assets.
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