Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth podcast. This week we explore private placement life insurance and how families should evaluate whether the promised tax advantages justify the structure and the embedded costs. Next, we discuss what happens when parental support meets venture capital and how families can thoughtfully approach investing in a child’s startup without distorting incentives or relationships. Then in our From the Field segment, we’re joined by Christine Alexis Concepción, Esq. to examine how families think about cross-border living, tax exposure, and long-term planning when life extends beyond just one country. So let’s jump in with question one.
Question 1 – Evaluating Private Placement Life Insurance
Stephan Shipe: So our first question here, we’ve looked at private placement life insurance a few different times over the past several years as a potential investment vehicle. The tax free growth and borrowing flexibility sound attractive, but every time we dig in, the structure feels complicated and the fees seem layered. What are we missing? If anything, what you’ve described is exactly the typical path that happens when we get to any type of permanent life insurance. So when we look at private placement life insurance, there’s not too much of a difference there on the — it’s still a type of permanent life insurance.
What it’s trying to solve is this idea of exclusivity a little bit, that with private placement, you’re able to take your investments and get into things that are not just your typical index funds. Maybe you can go invest in some private equities and VCs and hedge funds, or institutional level products or investments. The thought there is a lot of these are tax inefficient. So if you take these tax inefficient assets, go put them in this private placement life insurance policy, then it can continue to compound tax deferred, which could give you access to liquidity because then you can borrow off the cash value of the life insurance. And that’s the pitch, right? That’s the structure. You can get into some riskier stuff you can’t get into with regular life insurance. Maybe that increases the value at a higher rate. So you have a larger cash value in the life insurance. The larger cash value in the life insurance means that the actual insurance cost is lower, the death benefit costs are going to be there. And the larger the cash value, you can now borrow from it. And because you’re borrowing from it as a loan, it’s not income. So you don’t have to pay tax on it. And then your death benefit would pay that back at the end as part of your estate. So that’s the 10,000 foot view of what’s trying to go on here with the private placement life insurance. The issues that come up, and exactly what you’re describing, are these other levels of complexity that come with it. For one, for this to work, it’s not free. And there’s a cost associated with it — you’re paying the insurance costs and basically this overall insurance drag or fee drag that happens, which can be anywhere from 50 basis points up to 150 basis points, maybe even higher, depending on what the products are, plus the types of investments that are in there may have their own fees. And then those investments also have the same risk that we’ve talked about many times. If you’re jumping into any type of these alternative investments, these low liquidity assets, you’re always running a different type of risk there that may not compensate you, or you may not be compensated for that risk. So you have that risk already. You have this drag from a fee perspective. That is a real problem, especially over the long term. If you’re starting to have a tax or a fee drag of a percent or so on top of this, but the pitch back is always you can pull from this as income throughout your life. So you have liquidity without creating income. So you have the loan and everything else. The problem with that is the loan is not free. You pay interest back to yourself on the loan and then whatever the death benefit is, you have a reduction of that death benefit by whatever the loan is. It does start adding complexity.
What I would say is a decent alternative to this, with a little bit less complexity and the same type of idea, is the build, borrow, die solution — or the invest, borrow, die, however you want to go about it — which is you invest in a typical brokerage account. All of that money continues to grow. You have all of these embedded gains. If you try to pull from that, you’re going to have this tax issue. So instead of pulling from it, you go grab a securities backed line of credit. Use that to create a loan that you can pay back and your estate would pay it back later and your heirs still get a step up in basis on your estate. So it eliminates any tax consequences. That’s a lot simpler than trying to layer on all these additional products and fees and everything from the private placement life insurance and can accomplish a lot of the same ideas — you can still invest. Ideally, you can invest in something that is low cost. So imagine a situation where you jump into an index fund in your brokerage account, it starts racking up crazy amounts of gains and it’s gone from 10 million to 25 million and you need liquidity out of it to live off of. Then you go take a line of credit out backed by that index fund through your broker and live off that. And because you’re living off that, you’re not paying any income tax on it. And then upon death in your estate, you get to step up in basis anyways. And the cost basis just went from 10 million to 25 million for your heirs.
That’s a lot cleaner than getting into the complexity of the private placement life insurance. There’s a lot of issues I have with permanent life insurance. This has all the issues I have with permanent life insurance with an added issue of investing in illiquid assets on top, which tend to have even more fees. So if we can try to avoid this, I think we try to avoid this at all costs, even though it’s providing some benefits there. I think you can get those benefits somewhere else without having to get into this type of structure.
Question 2 – Investing in a Child’s Venture-Backed Startup
Stephan Shipe: And for our next question, our daughter is launching a venture backed tech startup and has asked whether we would participate in her seed round with $250,000. We want to be supportive, but I don’t want to create unintended pressure or distort the cap table. How do families usually handle something like this?
There’s no way that this doesn’t cause some sort of financial or family rift at some point in the future. And I mean that in all the best of intentions for your daughter and going through this. So you should — venture backed. So you’re going to have a VC backed in as one of the funders of this round. You’re going to come in at $250,000. If you’re going to do this, just like any type of family loan or investment, I want you to treat this like setting money on fire and you’re just going to put the money on fire and whether you get something back, that’s great. If you don’t get anything back, that’s expected. And that’s not just because it’s your daughter, but it’s because any type of venture investment, you’re going to have this risk, right? So you’re having a high risk and a concentrated position, assuming that you don’t have a lot of other venture investments. And you’re not going to really want to push your weight around because that’s when you’re going to get into the family dynamic issues.
So I would, if you’re going to go into this, there are a couple of ways where you can try to reduce some of those potential issues. One is if you’re going in with the VC firm, try to go in on the exact same terms as the VC. What that’s going to do is it’s not going to put you in any weird situation where you have priority of things or you have seniority, you have any type of governance control — try to avoid as much of that as possible. If you’re going in with the same terms as the VC, you’re not messing up the cap table at all. The other way that you can mess up this cap table, which I’d want you to be careful on — and I don’t know based on the question — is if you’re funding 250,000, how much is the VC putting in? Because if the venture capital company is putting in a hundred grand and you’re putting in 250 grand, then that’s going to be weird. If I was the VC investor, I’m concerned now because there’s not a lot of outside money coming in. We have the founder’s parents as one of the largest investors in the company, which doesn’t seem very independent to me as the VC, which only makes my holdings even more of a minority share. So we want to be careful on that kind of structure. So ideally, same terms as the VC if possible, and you not taking on too much of the ownership of the company, because that’s where you’re going to get into a lot of issues. Where if, let’s say, that 250 is going to represent 40% of the company, then you’re going in in this weird situation where you technically would have some weight to throw around from a governance perspective, from being able to push the direction of the company, but you really can’t because it’s your daughter running it. And then you risk the family dynamics. Now, if this is you putting in 250 and the VC firm’s putting in 5 million, then you’re not going to have any real say in that. So that’s actually a good thing for this type of scenario. So be careful in the amount, be careful on the terms. If she’s coming in there saying, no, I’m going to give you really good priority on anything — push back on that. Say you want the same terms as anyone else going in on that round, or at least the VC firm, and make sure there’s still enough room there so that way if she goes in for a Series B round or anything else, she still has some equity that she can sell that doesn’t put you in a situation where you become the majority shareholder down the road.
From the Field – Cross-Border Tax Planning with Christine Concepción
Stephan Shipe:
So next in our From the Field segment, we explore what happens when families build businesses and live across borders.
Today we’re joined by Christine Concepcion, an attorney who advises individuals and closely held businesses on complex international and domestic tax matters, including pre-immigration planning, expatriation, and cross-border structuring. Christine, welcome to the Scholar Wealth Podcast. To start, can you share a little bit about your background, how you got into this very interesting and complex world?
Christine Concepcion:
Absolutely. Thank you so much for having me, Stephan. So as you said, I’m an international tax attorney based in Miami. I have an office in Madrid and in Paris. And I help taxpayers, essentially either US taxpayers or individuals who will become US taxpayers, ensure that their cross border assets are being reported correctly in the US and structuring both inbound and outbound investments to limit exposure to certain US taxes and also make it efficient from a cross-border planning perspective. So my individual clients are oftentimes inbound clients who are moving to the United States temporarily, permanently, or simply just investing in the United States. And my outbound clients are US taxpayers who are moving abroad, typically Europe. That’s what I’m seeing most often, Europe and some Latin American countries, and they are either starting businesses or they’re keeping some businesses that they’ve had and they need to ensure that these structures are being maintained properly. And there’s a whole toolbox of assets that we have to ensure that their tax compliance and that their tax strategy is aligned both domestically and abroad.
Stephan Shipe:
So when somebody goes and tries to make that decision and you have a closely held business, whether it’s in the US or somewhere else, and the family’s trying to make a decision to move somewhere, what’s leading that decision? Is it being led by, Christine tells me that these are great places to move to, so I’m going to pick from this list, or is it, I went on vacation there or I have family in this place, this is where I want to live, and then they come to you and you say either, this is going to be a piece of cake, or this is going to be a nightmare?
Christine Concepcion:
Most of the time they’re flexible individuals, sometimes with school-age children, often not. And they have some sort of family connection or lineage in that particular country or that geography. That’s, I would say, the majority of my clients. But I have some other clients who say, you know what, I’ve been to France a bunch of times, I love it here, it’s pretty central, and they have a great banking system and beautiful housing. So we’re going to pick France. So I would say most of it, there’s some sort of connection, but maybe 25% it’s, you know, I love it over here and I just want to make this my second home or potentially a permanent home for the future.
Stephan Shipe:
And when you look at that from an advice perspective and somebody comes in — because I imagine there’s got to be some gut reaction to whether or not this country is going to be easy or not, or there’s going to be problems that they know about. What are the things you’re looking for? You mentioned a good banking system — is that high on the list? What are some of the things that are high up on the list and some things that really don’t matter too much?
Christine Concepcion:
Yeah, so let’s say a client comes to me, a potential client. We will look at their asset list, their organization chart. And we’re going to talk about their hopes and dreams and their family plans. Do they have children? Do they want to pass assets to their children? How flexible are you? What languages do you speak, if any at all? And if they really are very flexible, then we’ll just pick three or four countries that they’re interested in considering and then I’ll hire co-counsel in those specific countries and we’ll go through their asset list and say, okay, well, if this person moves to let’s say France or Italy, Spain or Portugal, what are the pros and cons? How can we manage their worldwide assets if we move permanently to one of these countries? And I said the word permanently, but it’s never really permanent.
First of all, these individuals want to do like a five-year test run and see how it goes. And then they might decide to stay. But at a certain net worth, what I have seen is that no one’s permanent anywhere. And they’re very flexible in going from one country to the next so that they don’t trip over certain tax rules that are going to overcomplicate their situation. And oftentimes they just say, you know what, I would love to be in France permanently, but after — France has an estate tax rule where if you’re there for five years, you’re considered a domicile provided that there’s certain indicia that you’re not yet a domicile. So you kind of have five years to play around with and they might just want to take advantage of those five years and live out this great life in France. But then they say, you know what, let’s go to the next country because there’s no way in hell that we’re going to become French domiciles for estate tax purposes.
So there’s this flexibility, which is fantastic, but they’ll just continue hopping around. And the question becomes, well, is it practical to continue hopping around every few years? And for the first two or three years, it might be practical. It might not be that difficult because it’s not that hard to settle down for a few years. But life circumstances change and you just never know what’s going to happen. So while they might want to hop around, who knows what happens in the future. But that is one of the considerations. Just the tax considerations for estate tax planning are sometimes so onerous that they’re like, we’ll be here for a little while and then we’ll just figure it out later.
Stephan Shipe:
And that would be on the personal side, but if you had a business, do you typically see the business kind of stays behind? Is that the idea? Because I imagine that structurally adds a lot more complexity than moving around residences, especially if you’re not dealing with any domicile concerns.
Christine Concepcion:
Yeah, so if your business is US based, we often — we’re talking about individuals with closely held businesses, as opposed to the Elon Musks of the world that are a majority shareholder or a significant shareholder in publicly traded companies. So we’re talking about entities where the owners, where the client, is able to control and have more flexibility with.
So these types of entities, what we can do is — let’s take a client, for example, that wants to move to Spain. I see this all the time. I’m a US citizen and I have an S corporation, but I want to move to Spain. Well, Spain doesn’t recognize what we consider pass-through tax treatment for this S Corp. So we typically have to restructure that S Corp here in the US, sometimes to a corporation, so that we can do some tax planning on the Spanish side. So if you use that logic for Spain, that’s going to happen also for different countries. So just as long as we’re flexible in the US — subject to certain limitations, like you can only change your tax classification every certain number of years in the US — we can still be flexible in the US and then they can continue moving on to whatever countries, just as long as they’re compliant with the local tax requirements and also thinking ahead probably six months to a year in advance of moving to the next country and becoming a tax resident in that country.
Stephan Shipe:
Can you dive into that concept of tax resident? Because I know that always throws people off. It’s like I’m a tax resident of this country, my business is actually in this country, and I’m a permanent resident over here. How does all that work just from a definitions perspective?
Christine Concepcion:
Sure. So if we’re thinking about US citizens, a US citizen and a green card holder, they are tax residents regardless of where they live. So that’s a very important key for US individuals who want to move abroad. If you’re a US citizen, you’re going to be subject to US income and estate tax no matter what and no matter where you live. If you’re a green card holder, you are an income tax resident and you are presumed to be an estate tax resident. You’re able to rebut that position under certain circumstances, but that’s for another podcast. But then when we’re talking about a US person moving abroad, we have to look at whether that US person is a tax resident of the particular country. So for example, you hear a lot about the 182 days, whether you — so most countries say that if you’re in that country more than 182 days, you are a tax resident of that country. Now we have to look at whether we have a tax treaty with that other country. And regardless, we still have to look at each country’s tax residency rules. I have a client from Spain that is not a US citizen, but they have US assets and they have a lot of Spanish issues that we deal with together.
And the question has always been, well, if the husband lives in a foreign country, let’s say he lives in Dubai, and then the wife and kids live in Spain, the question is, well, is the husband a Spanish tax resident? And oftentimes the answer is actually yes. Let’s assume that he’s in Spain for 70 days. Spain is actually going to say, you know what, he’s actually a Spanish tax resident because his center of vital interest is Spain. His kids are there, his wife is there, he might have some assets there like a long-term lease or he owns a home. So Spain is going to attract all of his income into Spain even though it was earned abroad. So each country is different, but you have to always consider, is there a day count? And even if you don’t meet the day count, is there an exception for center of vital interest that is going to attract residency despite not meeting the day count.
Stephan Shipe:
Interesting. And then the businesses, I imagine, once all that moves, you’re dealing with fiscal years and calendar years, depending on different countries, of when that transition happens and where the business is taxed.
Christine Concepcion:
Yes. And then that’s where tax planning comes into play because does a US person have a US corporation? Does he have a disregarded entity like an LLC owned by one person? And then the complexities are abundant. And let’s say we have a US entity earning US source income, but then the person earning that US source income, let’s say he’s living abroad — Spain might say, you know what, all of that income is attributed to the owner of the business and he’s going to pay 100% tax, or he’s going to be taxed on 100% of that income because he lives in Spain. Another issue is, well, that’s the personal income tax issues. But what about corporate? Does that US corporation have a taxable presence now in Spain?
And so now we have to look at permanent establishment rules under local rules, under the treaty. And so not only do we have to think about the individual, but we also have to think about what the company’s tax exposure is to that country. And you saw a lot of this during the pandemic. You had a lot of US companies whose employees decided to go move to Portugal, to move to Mexico, any — pick a country. And so the question for tax attorneys became, well, does that company now have a taxable presence in whatever country by virtue of having X amount of employees? Then you have to look at the function of the employee. Are we talking about someone who does back office IT or is that employee actually signing contracts on behalf of the company in the foreign country? So the levels of complexity, we can talk for hours about this.
But I think the important issue is to make sure that the client is aware of the complexities and to be able to issue spot — at least know that it’s complex enough that he or she needs to reach out to a competent tax advisor.
Stephan Shipe:
And where do you see people moving right now? In the sense you mentioned a lot of Americans moving to Europe. Are there any particular countries, I guess, in Europe or South America, Latin America — all the different places that you tend to specialize in — that you would say, this is the hot spot right now, everyone’s moving over to this country. And why? What’s causing that?
Christine Concepcion:
You know, I think because I have offices in Spain and France, I probably attract that type of clientele. So that’s what I see the most of. But also Belgium. There’s a lot of US citizens living in Belgium. And so I think those are the three main countries that I service. And I think the reason why people are leaving — I think social media has a lot of influence on where people want to live. People also want to just experience a different lifestyle and they might be running away from the United States for political reasons. And I think when it’s a political issue, my role is to also tell the client, look, you need to make sure that this is a logical decision as opposed to an emotional decision. And it might start emotionally, but then it turns into a logical decision to move abroad.
And I say, okay, if you move to the United States without doing anything, this is the world of hurt that you’re going to be in. And typically it’s a world of hurt because the people moving here have significant assets. So step one is looking at what they have and step two is restructuring what they have. And hopefully they have the foresight to say, let me engage in this process a year before moving abroad so that we can do this in the most efficient way.
Stephan Shipe
So a lot of what we’ve been talking about has been kind of one direction, US moving out to a different country. But one of the things you do is help people invest in the US. One of the big things that I’ve always seen — I’d love for you to maybe confirm or not confirm the thought — is that it’s a lot easier for someone who’s not a US citizen to invest in the United States, or in businesses or real estate in the United States, than it is for me as a US citizen to go invest in a business in Spain or real estate in Spain or Belgium. Is that true? And what are the big differences there?
Christine Concepcion:
Yes, it is absolutely true. And the reason is because the United States — most countries that we’re dealing with, we’re talking about capitalist countries with some social programs. But at the end of the day, there’s nothing like the United States where you can go on sunbiz.org for Florida, for example, and form an entity and have the confirmation in a few days.
And if you need it even sooner, Delaware — you can form an entity and have confirmation that it was formed in two hours. The next step is getting the bank account. You have access to the banking system. So I don’t want to say it’s very quickly, but it’s a lot faster than most countries. And I want to draw a parallel to two deals that I recently did. One, I needed to form an entity in India. It took us seven months to form the entity.
Okay, so we have been delaying all of this tax planning just because of that one entity formation. In Spain, it’s a lot faster than that, but it still takes — you can’t form an entity on the same day. You have at least a two month timeframe from the time that you form and get your bank account to the time that you’re able to launch the business. Okay, so if a foreign individual came to me and said, hey, Christine, I plan on buying real estate in the United States and I already have a foreign company, I can form that structure in days. Okay, I can do it incredibly quickly, but the same is not true when I’m trying to form a structure abroad. And it’s always the foreign part that takes the longest. And it’s just simply that this country is built on being a founder of a business. It’s built on small business enterprises. So without a doubt, it’s easier to come to the United States than to go abroad.
Stephan Shipe:
That’s great. No, perfect. And thank you for confirming that — that’s what I’ve always thought. You’re the one to ask to see if that is true or just something I’ve noticed anecdotally. But as we wrap up today, I really appreciate you getting into some of those details. Anything you’d like to share with listeners about that move or things to consider, anything that you think maybe you missed that you’d want to really drive home saying, listen, before you do this, obviously, they’ve got to call you.
Christine Concepcion:
Yeah, so I want to drive home again the planning. Planning in advance is crucial. And the second part is if you’re a non-US person and you want to invest in the United States, you have great rules in the US for you to avoid a lot of taxes, obviously legally. So you have a lot of structuring opportunities that we do not have as US persons.
And so before you even sign that contract to purchase real estate, make sure that you have a tax attorney working on that structure for you. And whoever tells you to buy in a US LLC and then transfer it later — that doesn’t work. It can work, but it’s still going to be a lot more complex to restructure that investment on the backend than if you do it at the front end. And it’s not that hard to build the first part of your international tax structure and leave it until you’re ready to purchase because it’s not that expensive to maintain it. But when you have a deal coming in and you want to purchase that deal really quickly, you might not have enough time to set up the international tax structure for purposes of closing that deal in the most tax efficient way.
Stephan Shipe:
Perfect. Love it. Thank you so much for coming on today and sharing some of this with us.
Christine Concepcion:
Thank you so much. Have a great day.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
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