Question from a US-based IM Member:
Q: “What are the best structures outside of IRAs to defer tax at the lowest rates?”
A (by Terry Coxon): There are several overseas opportunities for deferring income tax. However, none of them is a simple solution-in-a-box. None of them is right for everyone. None of them makes economic sense except as part of an overall financial plan. And most of them are practical only for an investment of at least US$1 million.
- Variable life insurance. Because tax-haven life insurance companies don't have their hands tied by regulators in any of the 50 states, they have more flexibility to design life insurance policies for the purpose of turning investment returns into tax-free income.
- Deferred payment sales. If you are planning to sell real estate, a collectible or stock in a private company, you can make an installment sale, fully secured, to a foreign company that in turn sells the property to the ultimate buyer. Your profit on the sale becomes taxable only as you receive the installment payments.
- Cash-method instruments. An installment sale may also be structured as a cash-method instrument, in which case the interest you are earning on the deferred payments becomes taxable only when you actually receive it. In the high-inflation, high-interest rate environment that I believe is coming, deferring taxes on interest is a big advantage.
- Growth collar. A growth collar uses an option contract between you and a foreign company to defer taxation on a pool of investments and convert the income into long-term capital gain. Growth collars are complex, but they are extremely versatile. They are especially useful if you own highly appreciated securities that you would like to dispose of without triggering capital gain tax.
- Foreign business companies. If you have an opportunity for a business that can operate in a no-tax or a low-tax jurisdiction, a foreign company can be used to accumulate and reinvest the profits in the growth of the business without any immediate tax consequences to you. You could own the company personally, or it could be owned by your IRA or 401-k plan. This is the only overseas tax-deferral strategy I know of that would be practical with a modest scale investment.