Life Insurance Captives for NRAs Investing in U.S. Real Estate and Businesses


The premise of this blog post is straight-forward. How can a wealthy non-resident alien invest in U.S. without paying any U.S. income taxes or estate taxes? The outline of the structure below is innovative and complex. Existing real estate portfolio’s can be transferred into the arrangement. the structure can serve as the vehicle for new investment into the structure.

Many wealthy non-resident aliens (NRA) have invested in the U.S. in commercial real estate as well as U.S. businesses. The current economic turmoil suggests that many European investors are investing in U.S. real estate as a safe haven. Many new Chinese millionnaires are looking for ways to invest in the U.S. as well. In spite of the difficult economic situation currently in the U.S., foreing investors see the U.S. as the most politically stable country on the planet.

From a tax perspective, this type of income is treated as effectively connected to a U.S. trade or business (ECI) for U.S. tax purposes. ECI is subject to a 25 percent withholding tax. When a NRA sells U.S. real estate, it is subject to FIRPTA which imposes a withholding tax obligation on the Buyer.

The current economic environment suggests tax rates are increasing. The Bush tax cuts expire at the end of 2012. the top marginal tax rate increases along with the long term capital gains rate. These tax cuts occur before any new legislation is put before Congress. Estate tax rates are also increasing.

The Problem

NRAs wth real estate and business holdings in the U.S. are generally taxed at ordinary taxes. FIRPTA, a real estate withholding tax, applies on the sale of U.S. real estate (equal to ten percent of the sales price), and a 35 percent withholding tax applies on business income.

The Solution

Most foreign jurisdictions which have the benefit of a tax treaty with the U.S. enjoy favorable tax provisions for annuity income. Under these tax treaty provisions, annuity income is not subject to U.S. income or withholding tax. Annuity income without the benefit of a tax treaty provision would be subject to a 30 percent withholding tax under IRC Sec 871(a).

A Private Placement Variable Annuity (PPVA) contract is a institutionally priced deferred  variable with customized investment options. PPVA contracts are cirtually “no load” annuity contracts. The customized investment options may include alternative investments including real estate. A PPVA contract may feature a real estate account that invests in U.S. real estate.

A offshore life insurance company may make an election under IRC Sec 953(d) to be treated as a U.S. taxpayer for the insurer’s tax purposes. In effect, the offshore is equivalent to a domestic life insurer for corporate tax purposes. It is the life insurer’s separate account which is the investor in the real estate fund within the PPVA contract.

A small life insurer under IRC Sec 806(a) receives special income tax treatment – a 50 percent deduction on investment income. The insuer may operate as a multi-line insurer that also issues property and casualty coverage to the Client’s operating businesses in the U.S. as well as foreign jurisdictions. Property and casualty reserves must be less than 50 percent of the total reserves. Life insurance companies receive a deduction for increases to reserves equal to its separate account income.

The small life insurer may be owned by the foreign family in an offshore trust. The shares will be outside of the estate for U.S. estate tax purposes. The insurance contract – PPVA contract – will also be a non-U.S. sitused asset under IRC Sec 2105. The real estate income within the PPVA contract converts ECI to “annuity” income which is exempt under most tax treaties with the U.S. The offshore insurer will also pay little or no U.S. corporate taxes.

An Example


Pancho Villar, is a wealthy Mexican industrialist, with children and grandchildren living in the United States. Panch created a Cayman Trust that owns $40 million of commercial real estate in New York City. The real estate has no debt and produces net rental income of $6 million of income to the trust. The grandchildren are beneficiaries of the Trust. Pancho’s grandchildren (six) live inthe U.S. . Some are U.S. citizens and others are Mexican citizens with Green Cards. Pancho has a net worth of approximately $70 million. His brothers also have large net worths and also co-own some of the businesses. Some of these businesses operate throughout Latin America and Asia.

Pancho would like to minimize his U.S. income and estate tax esposure on his U.S. commercial real estate holdings.


Mexico and The U.S. have a income tax treaty that provides for favorable taxation of annuity income. Under the treaty, annuity income is not subject to U.S. income and withholding taxation.

Pancho creates a New Zealand Trust that will own the shares of a new life insurance company domiciled in The Cayman islands. The company will make an IRC Sec 953(d) election to be treated as a U.S, taxpayer for U.S. corporate tax purposes.

The new insurance company will be licensed as a multi-line insurer. The insurer will provide low risk property and casualty insurance to the family’s business subsidiaries around the world. The insurer will also be lincensed to issue variable annuity and life insurance to non-residents of the Cayman Islands. Under Cayman insurance law, the insurer’s assets are segregated from the claim of the insurer’s general account asests. Capitalization for the company is initially $250,000.

The new insurer will issue a PPVA contract to the trustee of the New Zealand Trust. The beneficiaries of the Trust are Panch-s grandchildren. The PPVA contract will feature a real estate account that is managed by a family owned investment subsidiary. The investment manager of the real estate account will purchase the real estate on an installment basis. The sales price is likely to be discounted under current market conditions.

The buyer will be the insurance dedicated fund (IDF) within the PPVA contract. Following the sale, all real estate income and gains will be captured within the IDF. Pursuant to the tax treaty, annuity income is not subject to U.S. income and withholding tax. Additionally, the PPVA contract is considered to be non-U.S. sitused property for estate tax purposes. Therefore, all future U.S. income and estate taxes should be avoided (legally!).


The closely held insurance company provides a sophisticated solution for wealth NRA who own businesses and real estate in their home country and the U.S. The solution reduces home country taxation and shifts funds to a safe jurisdiction which is treated as a U.S. Commonwealth with special tax status. The insurer is also able to issue annuities maximizing a benefit withn the tax treaty and as a result convert business income into exempt annuity income. This is a sophisticated concept with a hundred “moving parts”. This blog post was intended to “wet the beak” from a 10,000 foot level.

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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