Insurance Curator For high-net-worth (HNW) individuals with cross-border ties, life insurance is a central tool for wealth transfer, liquidity planning, and tax mitigation. But when policies are owned, issued, or administered outside the United States, foreign ownership rules and estate inclusion risks can create unexpected U.S. income, gift, and estate tax consequences. This article explains the key issues U.S.-focused advisors and global clients must address, with concrete examples, pricing benchmarks, and practical mitigation strategies tailored to major U.S. jurisdictions (New York, California, Florida, Texas).
Why foreign-owned or offshore life policies matter for U.S. estate tax
- U.S. estate tax inclusion is primarily driven by incidents of ownership. Under Internal Revenue Code §2042, life insurance proceeds are included in the decedent’s gross estate if the decedent possessed any incident of ownership in the policy at death. See the statute for detail: https://www.law.cornell.edu/uscode/text/26/2042.
- Foreign insurers and FATCA/CRS reporting can trigger withholding, reporting, and transparency obligations that complicate reporting for U.S. taxpayers. FATCA rules can also require non-U.S. insurers to report policyholder and beneficiary information to the IRS or to withhold.
Practical implication: A U.S. domiciled insured who retains incidents of ownership over a policy issued by a non-U.S. insurer can still have the policy proceeds included in the U.S. gross estate — and foreign custody or withholding may reduce net proceeds available to heirs.
Typical scenarios and specific U.S. state considerations
Common fact patterns that raise risks:
- A U.S. citizen living in New York purchases a life policy issued by a Swiss or Cayman insurer and retains ownership/control.
- A U.S. domiciled insured funds a private placement life insurance (PPLI) policy purchased through an offshore structure to house alternative investments.
- A cross-border family uses an offshore trust or non-U.S. corporate owner to hold U.S.-issued policies.
State-level considerations (examples):
- New York and Massachusetts have active estate tax regimes with exemptions substantially below the federal exemption for many years—making careful structuring critical for clients based in these states.
- California, Florida, Texas: no state estate tax, but residency and domicile determinations (especially for persons with multiple residences) can change exposure. Use Residency, Domicile, and Policy Ownership: Avoiding Unintended Tax Traps for International Estates for deeper reading.
For a state-by-state map of estate/inheritance tax rules and thresholds, see the Tax Foundation analysis: https://taxfoundation.org/state-estate-inheritance-taxes-2024/
Private Placement Life Insurance (PPLI) and minimums: pricing and providers
PPLI is a common HNW solution because it allows custom investment wrappers inside life insurance (tax deferral on investment growth, potential income tax-free death benefit). Typical market facts:
- Minimum single-premium funding: commonly ranges from $1 million to $5 million, depending on the insurer and strategy. Smaller face amounts are rare for PPLI.
- Typical ongoing costs:
- Asset management/custody fees: 0.25%–1.25% annually (varies widely by manager and underlying strategies).
- Policy-level fees and insurance charges (COI/mortality): 0.5%–3.0% annually depending on insured age, gender, and underwriting class.
- Common providers: AIG, Prudential, New York Life, MetLife, Chubb and their private-client divisions often offer high-net-worth or private placement solutions; distribution may be through private banks or specialized broker-dealers.
For an accessible primer on PPLI structure and sizing, see Investopedia’s PPLI guide: https://www.investopedia.com/terms/p/private-placement-life-insurance.asp
Example illustration (not a quote): a 55-year-old preferred non-smoker funding a PPLI with $3,000,000 may expect:
- Annual asset management + policy fees ~ $12,000–$60,000 (0.4%–2.0%).
- Insurance COI charges that increase with age and reduce cash value growth.
Premium financing (banks such as Bank of America Private Bank, JP Morgan Private Bank, Goldman Sachs Private Wealth Management commonly provide financing) adds another layer of cost—typically variable rates pegged to SOFR/LIBOR plus a spread (illustrative all-in financing cost historically in the ~4%–8% range, depending on market).
How foreign ownership increases estate inclusion and reporting risk
Key mechanisms:
- Incidents of ownership: Ownership, power to change beneficiary, assignment, or ability to surrender the policy — any of these can pull proceeds into the U.S. taxable estate even when the contract is issued offshore (IRC §2042).
- Gifts and transfers within three years: If an insured transfers incidents of ownership within three years of death, transfers may still be pulled back into the estate (IRC §2035).
- Foreign beneficiary / foreign trustee: Payments to foreign beneficiaries can be subject to foreign withholding or be reported under FATCA; failure of the foreign insurer or trustee to handle FATCA/CRS compliance properly can trigger withholding or reporting that complicates U.S. tax filings.
Practical structuring checklist to reduce U.S. estate inclusion and cross-border friction
- Use an irrevocable life insurance trust (ILIT) domiciled and administered correctly (and outside the insured’s control) to remove incidents of ownership. ILITs remain the most reliable structural solution in the U.S. for removing proceeds from the gross estate.
- Prefer U.S.-domiciled insurers for client policies intended to pay U.S. estate beneficiaries — this minimizes FATCA friction, U.S. tax-wiring capability, and regulatory certainty.
- When considering PPLI or offshore wrappers, ensure legal opinion addresses:
- U.S. income tax treatment of inside investment growth.
- Estate inclusion risk under IRC §2042 and related anti-abuse provisions.
- FATCA/CRS compliance protocols.
- Coordinate cross-border structures with residency and domicile analysis—see Residency, Domicile, and Policy Ownership: Avoiding Unintended Tax Traps for International Estates.
- If using offshore policies, confirm the insurer’s U.S. withholding policy and tax reporting; consult FATCA, CRS, and Reporting Requirements for Cross-Border Insurance Holdings.
Onshore vs offshore: quick comparison
| Feature | Onshore (U.S.-domiciled insurer) | Offshore (non-U.S. insurer / PPLI offshore) |
|---|---|---|
| Regulatory certainty for U.S. clients | High | Lower — depends on domicile |
| FATCA/withholding friction | Minimal | Higher; may require extra reporting/withholding |
| Typical minimums | Varies; life products available at many levels | PPLI offshore: commonly $1M+ |
| Estate-inclusion risk if insured retains control | Same legal tests (incidents of ownership) | Higher practical risk due to trustee/ownership structures |
| Investment flexibility | Good (onshore UL/UL/IUL, PPLI onshore exists) | Often greater for alternative assets |
Case framing: New York-based entrepreneur with foreign policy
A New York resident funds a $5M offshore PPLI policy and retains the power to change the beneficiary via a power of appointment. At death, that retained control is likely treated as an incident of ownership, triggering inclusion of the policy proceeds into the decedent’s federal and New York taxable estate. Because New York’s estate exemption is lower than the federal threshold, the client could face significant state estate tax exposure in addition to any federal estate tax.
Solution blueprint:
- Transfer the policy to an ILIT (no retained incidents of ownership).
- Confirm transfer timing is outside of anti-recapture rules (e.g., the 3-year rule).
- Engage the insurer to confirm FATCA compliance and beneficiary payment logistics.
Next steps for advisors and HNW clients (U.S.-focused)
- Inventory all life policies (onshore and offshore), note the owner, beneficiary, trustee, and incidents of ownership.
- Run domicile/residency analysis for clients in New York, California, Florida, Texas, and other key states.
- Obtain legal opinions when using offshore PPLI or foreign trustees; coordinate with tax counsel for IRC §2042, §2035, and FATCA/CRS exposures.
- Consider onshore alternatives or structured ILIT ownership to remove estate inclusion risk.
- If premium financing is used, model financing spreads and stress-test the structure under interest rate volatility.
For technical structuring related to PPLI and multijurisdictional trust coordination, see Structuring PPLI and Offshore Policies to Comply with Home-Country Regulations and Coordinating Multijurisdictional Trusts and Insurance for Efficient International Wealth Transfer.
Authoritative resources and sources
- Internal Revenue Code §2042 — inclusion of life insurance proceeds: https://www.law.cornell.edu/uscode/text/26/2042
- FATCA (IRS): https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca
- Investopedia — Private Placement Life Insurance overview: https://www.investopedia.com/terms/p/private-placement-life-insurance.asp
- Tax Foundation — state estate and inheritance taxes map: https://taxfoundation.org/state-estate-inheritance-taxes-2024/
- IRS Estate and Gift Tax general guidance: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
Foreign policies can unlock investment flexibility but carry material U.S. estate, reporting, and withholding risks for U.S.-domiciled HNW clients—especially in states like New York and Massachusetts. The combination of careful ownership structuring (ILITs or trusted trustee arrangements), preference for U.S.-domiciled insurers where appropriate, and bespoke legal opinions is essential to preserve the tax-efficient benefits of life insurance without unexpected estate inclusion.