Using Annuities for Tax Deferral
With annuities, your money keeps comdollaring
completely tax-deferred until you're ready to take it
out.
This technique is not just for the wealthy. Let's
assume that you are in the 33% tax bracket (counting
federal, state and local taxes). Let's say that you
put $30,000 into a taxable investment that averages 10%
return each year. After 10 years you'd have $57,380.
But if you put the same $30,000 into an annuity that
averages the same 10% return, your money is comdollaring
without taxes taken out every year, and after 10 years
you'd have $77,812.
In other words, by keeping the government's hands
off your money, you earned an extra $20,432. And
that's after just 10 years. Over 20 years, the
difference would be $92,074.
Until a few years ago many Swiss annuities were
not a particularly good deal, with some high initial
charges. That is no longer the case, and there are now
some superb products available to American investors.
A new Swiss annuity product (first offered in
1991), Swiss Plus, brings together the benefits of
Swiss bank accounts and Swiss deferred annuities,
without the drawbacks -- presenting the best Swiss
investment advantages for American investors.
Swiss Plus, is a convertible annuity account,
offered only by Elvia Life of Geneva. Elvia Life is a
$2 billion strong company, serving 220,000 clients, of
which 57% are living in Switzerland and 43% abroad.
The account can be denominated in the Swiss franc, the
U.S. dollar, the German mark, or the ECU, and the
investor can switch at any time from one to another.
Or an investor can diversify the account by investing
in more than one currency, and still change the
currency at any time during the accumulation period --
up until beginning to receive income or withdrawing the
capital.
Swiss Plus offers instant liquidity, a rarity in
annuities. All capital, plus all accumulated interest
and dividends, can be freely accessible after the first
year. During the first year 100% of the principal is
freely accessible, less a SFr 500 fee, and loss of the
interest. So if all funds are needed quickly, either
for an emergency or for another investment, there is no
"lock-in" period as there is with most American
annuities.
Although called an annuity, Swiss Plus acts more
like a savings account than a deferred annuity. But it
is operated under an insurance company's umbrella, so
that it conforms to the IRS' definition of an annuity,
and as such, comdollars tax-free.
Swiss Plus accounts earn approximately the same
return as long-term government bonds in the same
currency the account is denominated in (European
Community bonds in the case of the ECU), less a half-
percent management fee.
According to Swiss law, insurance policies --
including annuity contracts -- cannot be seized by
creditors. They also cannot be included in a Swiss
bankruptcy procedure. Even if an American court
expressly orders the seizure of a Swiss annuity account
or its inclusion in a bankruptcy estate, the account
will not be seized by Swiss authorities, provided that
it has been structured the right way.
There are two requirements: A U. S. resident who
buys a life insurance policy from a Swiss insurance
company must designate his or her spouse or
descendants, or a third party (if done so irrevocably)
as beneficiaries. Also, to avoid suspicion of making a
fraudulent conveyance to avoid a specific judgment,
under Swiss law, the person must have purchased the
policy or designated the beneficiaries not less than
six months before any bankruptcy decree or collection
process.
Swiss annuities provide investment and tax
benefits that are far superior to American annuities.
Some annuity holders are afraid that if they cash in
their old annuities they will have to pay taxes on the
accumulated earnings of the cash value. That's not
true. The tax code allows you to exchange insurance
policies tax free. You can exchange life insurance for
life insurance, an endowment contract for another
endowment or annuity contract, and an annuity for
another annuity. A recent Tax Court case makes the
exchange even easier. The taxpayer's old insurer
refused to transfer the cash value of her old annuity
to the new insurance company selected by the taxpayer.
Instead, the old insurer issued a check to the
taxpayer, and the check was immediately reinvested in
the new annuity. The IRS claimed that there was income
when the check was received because the taxpayer was
not bound to reinvest it. The Tax Court disagreed. It
said that the tax-free exchange provision is to be
broadly interpreted. You can cash in your old policy
and use the proceeds to buy a new policy immediately.
(Green, 85 TC No. 59(1985))
The IRS ruled that the tax-free exchange of
insurance policies applies when you exchange an U.S.
annuity for a foreign annuity. There is no requirement
that either or both of the insurance policies exchange
be issued by insurers doing business in the United
States (Letter Ruling 9319024).
The Swiss annuities are not foreign financial
accounts, and therefore need not be reported on your
tax return nor on the special form for reporting
foreign financial accounts.
