Russia: Exchange of information and Exposure; It will happen

How can we help?
1. The best possible asset protection is required; well before exposure
2. Wealth Assurance has the strongest asset protection regime
3. Guidance in finding the right structure, jurisdiction and provider

Exchange of Information:
No matter the instrument used – on request, convention, bilateral – Exchange of Information will eventually happen and will lead to exposure. Russia committed to Automatic Exchange of Information (AEOI) and to the Common Reporting Standard (CRS); it aims at exchanging information as of September 2018.

The only, potentially relevant, structures that are formally exempt are life policies with a Zero Cash Value (ZCV); including certain Term Life Insurances. All other structures and entities, including Wealth Assurance are or will be in the scope of CRS. CFC rules are also to be considered. Therefore, well advised clients will have their house in order before the end of 2016.

Need for asset protection:
If there is no escape from CRS, one must be protected against the consequences of CRS. Only the strongest possible asset and investor protection regimes are good enough to protect the Russian client against unjustified claims from business partners, competitors, (ex) spouses, family members, aggressive officials, raiders and others.

Criteria of solid solutions:
There should be an undisputable change of legal and economic beneficial ownership to an independent and opposable third party. The structure should be legally and tax compliant, including in Russia. It should be admissible in Russian court. It has to be geared on wealth preservation and it should have a robust civil law rational.

Therefore, more and more well-informed Russian investors, with assets abroad, are selecting Wealth Assurance as a planning structure; not only for asset and investor protection but primarily for estate planning and/or as a private holding structure, while some tax planning opportunities are also available. There are very limited reporting requirements for Russian tax residents if properly structured and it provides international portability in case relocation becomes an option. Wealth Assurance has nothing to do with a classical life insurance but it is issued by certain life companies.

Wealth Assurance; how does it work?
The policyholder contributes the assets that he or she wants to protect as a one-off premium payment, in cash or in kind, to a bespoke investment fund created by the life insurer. The life insurer opens a dedicated account at a custodian bank for the underlying assets of the policy.

The policyholder may select an investment strategy and nominates an investment manager but the life company formally appoints that investment manager. Usually, the custodian bank and the appointed investment manager are the same bank that held the investment portfolio before the premium transfer. This internal investment fund is exclusively linked to the policyholder’s life policy. The value of the Wealth Assurance policy is equal at all times to that of the underlying internal investment fund.

The life insurer has now become the Ultimate Beneficial Owner (UBO) of the underlying assets. In return for the premium payment, the policyholder has a “claim” on the life insurer for the value of the underlying investment fund. He can withdraw and/or surrender at any time during his life time, although surrender penalties may be applicable during an initial period of several years. Following the initial period, withdrawals or surrenders can be made penalty-free.

There is general consensus in the doctrine that as long as the underlying assets are held by the life company, they can’t be seized by creditors of the policyholder or other claimants unless the assets were placed in the life policy during the suspected period prior to the policyholder’s bankruptcy.

Relevant jurisdictions in Wealth Assurance:
Luxembourg, Liechtenstein, IoM, Bermuda and the Bahamas all have strong asset protection laws and jurisprudence to enforce them. The differences are more on the investor protection side. The regulator in Luxembourg insists on the use of approved custodian banks in the EEA and Switzerland. The regulator in Liechtenstein doesn’t even require a custodian bank to hold the underlying assets. Bermuda is very flexible and it relies on the life companies to work out a custodian relationship with solid banks anywhere in the world such as Singapore, Hong Kong, Dubai. Expert guidance of an independent intermediator, not hindered by conflict of interest, is required to get a good offer from suitable life companies.

Zero Cash Value life policies:
Zero Cash Value (ZCV) life policies like certain Term Policies or certain Whole of Life policies with a zero cash value for the client, are explicitly excluded from the scope of the CRS and likely from the scope of Russian CFC rules. The policyholder cannot withdraw, pledge or take an advance. The benefit of the life policy will go to the appointed beneficiary at death of the life assured but leaves no cash value for the client during his life time. Even if the policyholder terminates his contract voluntary, or is enforced by any third party to do so, he cannot access the assets in the ZCV life policy.

ZCV life policies are the ultimate asset protection tool; the client can change the beneficiaries during his lifetime but the assets left his estate irrevocably. This is exactly the reason why ZCV life policies could be of interest as a partial solution for certain irreversible succession planning objectives.

Level Term Life Insurances:
A Level Term Life Insurance provides coverage at a fixed annual premium for a defined period of time, such as 10, 20 or 30 years. If the client dies within the term, the death benefit will be paid to the appointed beneficiary. But the policy has ZVC for the client if he survives the term. The death cover can be very significant and the annual, fixed premiums are extremely competitive; e.g. a fixed annual premium of $ 30k for a 40 year old to cover a death benefit of $ 20m for a 30 year term.

Their primary use is to provide coverage of financial responsibilities for the insured or his beneficiaries, such as providing immediate liquidity for the surviving spouse and other beneficiaries in anticipation of the liquidation of the business cluster of the insured. Probably an excellent solution for certain individuals but definitely not a general applicable solution.

Written by
Toon Meyer
Director Business Development


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