Tax-deferred Annuities Now Going Offshore

The power of tax-deferral for your offshore investments is here! Global investors can now benefit from a safe, tax-deferred vehicle from Switzerland with the new variable annuities offered by JML.

A Swiss variable annuity is essentially a Swiss bank account wrapped in an annuity contract. By putting an annuity wrapper on a group of Swiss bank mutual funds, we are able to exclusively offer a tax-favored environment for our American clients.

In a few words, here's how it works. You invest a lump sum up front, structuring your portfolio as you see fit into sub-accounts. Money can be put into bond and equity fund portfolios allocated according to your investment goals (e.g., income or growth). It is a "variable" annuity (as opposed to a "fixed" annuity) because returns are not guaranteed, but you have considerable freedom to choose where your money goes. Unlike a mutual fund which may incur capital gain and investment income taxes each year, variable annuities are sheltered from income and capital gains taxes during the accumulation phase and partially sheltered from income taxes during the payout phase.

You can also transfer money from sub-account to sub-account without incurring taxes. If you die during the accumulation phase -- the so-called "death benefit" -- your heirs would get at least as much as you had invested, even if your investments declined in value. This is the insurance aspect. But like a mutual fund, you take on the risk of the market tumbling to get potentially higher returns.

During the payout phase, the advantages of tax deferral continue for the amounts still invested. The portion of the payout considered as gain is taxed at ordinary income rates (usually lower after retirement) while the portion considered to be return of principal is not taxable.

Swiss vs. American variable annuities

How does a Swiss variable annuity differ from a U.S. variable annuity?

Low, low fees. If you've been turned off by variable annuities in the U.S. because of the hefty annual fees -- 2.09% on average, or more than 40% higher than the fees on the average mutual fund -- our Swiss variable annuities come with maximum annual charges of only 0.6%, or less than half of those for the average mutual fund. This, along with tax deferral, ensures you maximize the power of long-term compounding for your investments.

Full asset protection. Some states, including New York, Florida, and Texas, protect some assets in variable annuities from creditors. Swiss variable annuities offer 100% asset protection, independent of which state you live in. If you are susceptible to lawsuits, you should know that asset protection of variable annuities is provided under time-tested Swiss insurance and annuity laws. The law simply states that if you designate your spouse or children (or a third party irrevocably) as beneficiaries, then the policy may not be seized by your creditors. You don't need complicated legal structures. Compare this with offshore trusts.

Swiss privacy. Then, of course, there's the privacy only Switzerland offers. Like a Swiss bank account, your investment is protected from prying eyes. It is not reportable as a foreign financial account and no U.S. excise taxes are incurred, unlike with other foreign annuities. Information about your investment may not be released to any third party, unless you have committed a crime punishable under Swiss law. This includes tax fraud but not tax evasion.

Safety sine qua non. In the U.S., investors have to do their homework when it comes to choosing an insurance company. A company may offer extremely attractive products, but may not, in the end, be able to stand behind them. In the more than 150-year history of Swiss insurance, in stark contrast, not a single company has had to forfeit on its obligations. This fact alone would make a Swiss annuity investment a pretty safe bet. But for added protection, your investments are held in segregated accounts, which would remain separate from the insurance company's own accounts in case of bankruptcy.

No Swiss taxes. You will never have to pay Swiss withholding taxes, unlike with a Swiss bank account. For that matter, no inheritance, wealth, or any other taxes.

Global diversification. Most experts will agree that global diversification makes sense, and particularly at a time when U.S. markets are at record peaks. At least 40% of your entire portfolio should be invested in markets other than your own for optimum performance. All subaccounts offered in our variable annuities are well-diversified in global equities, bonds or currencies.

Time to switch

If you already own a variable annuity from a US company, now is the time to consider making a tax-free exchange (called a 1035 exchange) to a Swiss annuity. It's as easy as switching between your American annuities. The difference is what you get after: the advantages you only find in Switzerland.

Questions and Answers

What choice of investments do I have for a Swiss variable annuity?

As with any portfolio, strategy is all-important. The strategy you pick has to meet your personal requirements and risk profile. A Swiss variable annuity portfolio can be constructed in four different styles with the following expected returns and risk (volatility): All subaccounts have a well-diversified currency allocation, and thus bring you the full benefit of global diversification. That is, should dollar-denominated assets fall in value, your portfolio will have other currency holdings to mitigate in full or in part the effects of such a fall.

Due to its limited volatility, the Bond Subaccount is suitable for highly risk-averse investors or those seeking to secure earnings over time. The Income Subaccount has a conservative investment style, but takes higher risk than the Bond Subaccount for steady income growth. The Balanced Subaccount maintains a more or less even mix of bonds and equities, neither too hot nor too cold. The Growth Subaccount is for long-term investors willing to accept greater short-term price fluctuations for their holdings.

Just as you wouldn't wear a sweater in the height of summer, should your needs change, you have the option of changing your investment style. For example, closer to retirement you may want to switch from a growth to a bond or income subaccount to reduce your portfolio's volatility.

How diversified are my investments in a Swiss variable annuity?

The inside build up of a variable annuity is tax-free only if the underlying subaccount is adequately diversified within the meaning of the U.S. tax code. An account meets the diversification requirement if:

  • a) No more than 55% of the value of the total assets of the account is represented by any one fund;
  • b) No more than 70% of the value of the total assets of the account is represented by any two funds;
  • c) No more than 80% of the value of the total assets of the account is represented by any three funds; and
  • d) No more than 90% of the value of the total assets of the account is represented by any four funds.

This is the so-called "diversification rule" which all foreign variable annuities must adhere to for U.S. tax-deferral status. In this particular case, we have to admit, U.S. strictures on foreign products benefit investors by guaranteeing that your risk does not increase over time. Normally, it's precisely those riskier investments that take an ever-increasing share of your portfolio.

To make certain that your Swiss variable annuity complies with the diversification rule at all times, we re-balance your portfolio on at least a quarterly basis.

In addition, you have the advantage of a globally diversified portfolio on all available subaccounts.

To find out detailed information on an investment portfolio suitable to your needs, please fill in the Request for an Investment Proposal form.

Creditors think twice

If potential creditors want to go after your Swiss annuity investment, they will have to think twice. Collection proceedings in Switzerland promise to be tough, time-consuming and expensive. Tough because private ownership and wealth preservation are principles traditionally respected in Switzerland. Time-consuming because the case could go all the way up to the Swiss Federal Supreme Court. Expensive because creditors will have to deposit funds for court costs and attorney's fees.

How does protection under Swiss law compare with that for offshore trusts?

Not every offshore center is the same with regard to taxes. Swiss protection comes tax-free. Non-residents will never have to pay any Swiss taxes whatsoever.

The basis of a trust is the transfer of ownership to a trustee. In contrast, a Swiss annuity holder is the owner and retains full control so long as he or she remains solvent. Swiss protection lets you be in control.

Lastly, Swiss protection is easy to obtain in comparison to trusts. You won't need expensive lawyers, nor expensive structures. Just fill out the Request for an Investment Proposal form. That easy.

Obstacle course for creditors.

9 obstacles for creditors attempting to get to your Swiss annuity.

  • 1. Creditor must know a policy exists in Switzerland and which company is the contractual partner.
  • 2. Creditor must come to Switzerland, hire a Swiss attorney, who works on an hourly fee only (average US$250 per hour), and make an initial deposit of US$1,000 for his services.
  • 3. A Swiss lawyer must accept the mandate and try to obtain an attachment order.
  • 4. Creditor must have a specific claim, based on an enforceable judgment or on a recognition of debt.
  • 5. Cantonal authority must order the attachment of the policy.
  • 6. Creditor must deposit funds for court costs.
  • 7. Policy owner files a protest and within 10 days creditor must file a civil suit against the policy owner.
  • 8. Creditor must prove that fraudulent conveyance is involved.
  • 9. Swiss court must declare policy invalid.

JML Swiss Investment Counsellors was founded by Jurg M. Lattmann in 1974 and specializes in developing and marketing Swiss and global investments to overseas clients.

As independent counsellors, JML has no obligation to banks or insurance companies. This rules out conflicts of interest and leaves us free to concentrate on our sole commitment - our client's welfare.

More than 20,000 overseas clients have entrusted JML with assets worth more than 3.5 billion Swiss francs. We are firmly committed to proving their confidence in us to be well-placed.

Take a look at JML's Main Services Page and request the information by filling out the form you're interested in.

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