In the new and exciting platform I announced yesterday, I have a along suspect that it contains a potent feature. I never dare to tell others my suspicious until today finally I got my answer in WRITING. Before I proceed, let’s do 101 Estate Duty:

On death of a person, whatever assets he or she leaves behind is called the Estate. This estate is subjected to government tax known as estate duty or death tax in certain country. For example, a Singaporean who stays in Singapore (known as Singapore domiciled) who dies will be exposed to death tax imposed by the Singapore government for cash assets above S$600,000. But this is not all. If such a person buys assets in another country, for example if he buys an ETF listed in United States, that ETF is subjected to US government death tax if that aggregated assets exceed US$60,000. US government estate duty is a whopping 55% !! Because of this problem, many financially knowledgeable people feared investing overseas. On the other hand, many ignorant people don’t know about this and as a result their survivors are left to ruin when the estate is taxed heavily and on some occasion twice or triple. I only gave the example of US but there could be other countries having this same problem.

The new and exciting platform solves this problem! Amazingly indeed. Consider a Singaporean who wants to invests overseas. He first sign up a life insurance contract with the insurer (blur already?). The insurer issues a life insurance policy. He – being the policyholder and the life assured – instructs the life insurance company to buy securities on his behalf. The securities that can be bought are not limited to the funds that the insurer has. As long as the security got an ISIN or SEDOL code, it can be included. I have checked that ETFs listed in London Stock Exchange and those at the US can be included. Stocks can also be included. My colleague found a funny mutual fund in Hong Kong and that could also be included. (But one weird Brazilian fund cannot be included because Brazilian dollar is a non-tradable currency.) Many hedge funds and structured products issued by don’t know who and entirely unrelated to the insurer also can be included too. Anyway, the life insurance policy is merely a “wrapper” to encapsulate all these securities.  In the United Kingdom, this “wrapper” is a call a portfolio bond. But the word “bond” has nothing to do with fixed income (why must they use the same word?).  

Now, the underlying securities are registered in the name of the insurer. The insurer is the legal beneficiaries of the securities. The policyholder has no direct link with the securities. Instead, his link is a life insurance contract with the insurer. The policy permits him sell/buy the securities within the portfolio and to make regular or ad-hoc withdrawal without penalty provided whatever remains exceed 10% of original principal or USD 15,000 whichever is higher. If the balance breach below this limit, then a surrender penalty is imposed. But this surrender penalty is merely the outstanding commission that is supposed to be paid to the adviser (and some to the insurer). Guess how much the commission is? Cannot be much more then selling that unit trust lah!

Now, what happens when the life assured/policyholder dies? The life insurance contract says that the sum assured will be paid to his estate. The sum assured is 101% of the market value or market value plus US 15,000 whichever is lower. Due to such low coverage, there are no insurance charges in the portfolio bond. What happens to the underlying securities? The insurer will automatically redeem these securities. Since the insurer has all along the legal owner, the selling will not result in the policyholder paying for the death tax to the foreign governments.  

This “wrapper” effectively shields the policyholder from estate duty from foreign governments. However, since this wrapper is issued in Singapore under Singapore law, a Singaporean domiciled in Singapore will be required to pay estate duty to the Singapore government. I think that’s fine.

Today, I got a WRITTEN email from the insurer’s head office on this potent feature. At least now I got a written proof that this wrapper can help its policyholder avoid foreign estate duty.  

One question people will immediately ask is this, what happens if the insurer goes bust? Remember that Barings was brought down by one trader in Singapore. Firstly, the life insurer is supervised by MAS and as well as the government in Isle of Man. Secondly, the Isle of Man insures 90% of the assets. Well, it isn’t 100% but that’s still OK consider if a person would to buy stocks overseas, his brokerage house could also run away. While some overseas brokers are insured against such losses too, but an individual will still have to fly there and engage lawyers to get his money back. Net of legal fees and airplane tickets, maybe only less then 10% left to bring home! But for this one, at least MAS and Isle of Man will be involved. Two big brothers better then none.

Where is Isle of Man located? It is an island between United Kingdom and Ireland.