The Foreign National market is large, lucrative and underserved. But to excel in this market it’s important to qualify clients upfront. The following case study provides an example of how to qualify a prospect and then offer the right solution.
Jessica, 26, recently graduated from UC Berkley with a master’s degree in Software Development. An American citizen both by birth and family ties, she had just accepted a lucrative job from a leading social media company. She has arranged to meet with Susan Smith, her advisor, to start professional financial planning.
During the initial conversation, Susan discovered that Jessica’s father Ron was not a U.S. citizen or resident. Ron, who lives in China for 11 months of the year, visits the U.S. twice a year to see Jessica. He also meets with his financial advisor, who manages a $5 million brokerage portfolio. Susan also learned that Jessica’s mother, who died when she was a child, was a U.S. citizen.
A Potential $2 Million Estate Tax Liability
After giving her condolences on the loss her mother, Susan asked if Jessica’s father was aware of his potential liability under U.S. estate tax law. Jessica did not have the answer but promised to find out.
After the meeting, Susan immediately contacted Advanced Planning with Highland/Ladenburg to discuss Ron’s situation. During that conversation, Susan learned more about Ron’s predicament, including:
- A non-resident foreign national does not enjoy the same lifetime exemption limits as U.S. citizens and resident aliens, currently $11.4 million for singles $22.8 million for married couples.
- Non-resident foreign nationals only have a $60,000 lifetime exemption for U.S. situs property. This raised a red flag for Susan, who decided to mention the issue at her next meeting with Jessica.
A week later, Susan received a call from Jessica. Ron was under the impression that the U.S. estate tax was only an issue for estates valued above $11.4 million. Ron believed his $5 million brokerage account was well below the limit.
Based on her prior Advanced Planning conversation, Jane explained that in the event of Ron’s death, only $60,000 of the $5 million inside his U.S. brokerage account would be shielded from U.S. estate taxes. The remaining assets would be taxed at 40%, resulting in an estate tax liability of almost $2 million!
Susan suggested that Jessica and Ron join her on a conference call so they could discuss the situation. Jessica agreed, and set up the call for the following day.
On the call, Susan carefully explained the differences in estate tax structures between U.S. citizens/residents and non-resident foreign nationals and made several recommendations.
Life Insurance to the Rescue
Ron was so impressed with Susan’s subject matter knowledge and her willingness to go above and beyond that he agreed to follow Susan’s recommendations. His to-do list included taking the following actions:
- Fly to the United States and sign an application for U.S. life insurance
- Undergo a medical exam in the U.S. for insurance underwriting purposes
- Have his financial records in China and the U.S. sent to the carrier for financial underwriting
- Instruct his doctors to send APSs to the carrier’s Underwriter
- Use his existing $5 million brokerage account to fund the life insurance premiums
- Return to the U.S. and take policy delivery
A Daughter, Protected
Once the underwriting was complete, Susan met with Ron to deliver his new life insurance policy. It guaranteed a death benefit of $5 million. In addition, it provided for an increasing death benefit as the cash value increased. Upon Ron’s death, the life insurance could be used to pay the U.S. estate tax on his brokerage account. And millions of dollars would still be left to Jessica.
We’re Here to Help
For Foreign Nationals, access to U.S. life insurance provides significant advantages while addressing unique and specific needs critical to their financial interest in the U.S. However, additional requirements, specific processes and procedures are critical to executing proper insurance placement for Foreign Nationals.
Do you have current clients or prospects who might have connections with wealthy foreign national family members and be subject to U.S. estate taxes? If so, email Highland Advanced Planning at email@example.com.
About the Author
Austin Jarvis, Vice President, Advanced Sales – Taxation, provides expertise in the areas of income taxation, life insurance design, estate planning, business succession, and retirement planning. With experience in the Gift & Estate Tax Section of the Internal Revenue Service, he brings a unique perspective to planning.
Austin’s primary role is to support the registered representatives of the Ladenburg Independent Advisory Brokerages (IABs). He is a resource for advanced sales presentations to advisors and a ready resource for advisors with advanced sales and taxation cases.