Hackers Underworld 2: Forbidden Knowledge

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USING ANNUITIES FOR TAX DEFERRAL An annuity is a tax advantaged way to put aside money for retirement, or other, objectives. Annuities may be among the best ways to create retirement income. They allow savings to grow tax-deferred, building assets faster than other investments. The way this works is that money is invested with an insurance company. Annuities may be a good investment for many long-term goals, but several features make them especially well suited for retirement savings: * No Annual Investment Ceiling. There is no limit to the amount that can be put into an annuity each year. Other tax-advantaged plans such as IRAs should not be overlooked for retirement savings, but the amount that can be contributed each year is limited. * The Power of Tax-Deferral. Money will grow faster than in a taxable vehicle with a similar rate of return for several reasons. Not only does the interest accumulate tax-free until withdrawal, but funds that otherwise would have been used to pay taxes remain in the account for additional earnings. And if the payments are not taken until retirement, the recipient is probably in a lower tax bracket at that time. * Security for One's Family. If the purchaser dies before distributions begin, their family (or other beneficiaries) can receive the full value of the annuity. By naming a beneficiary, the annuity may even bypass probate and eliminate the associated costs and publicity. * Simplicity. There are no annual IRS forms to file, and there is no entry on Form 1040 until the payments actually begin. An annuity can offer the investment returns of a mutual fund, but deferring the tax until after retirement. Though unglamorous, an annuity is one of the investment industry's fastest-growing products. The annuity also contains some of the tax-deferred benefits of an individual retirement account or employer-sponsored 401(k) plan. Although it has been available for more than 20 years, sales have boomed in the last few years. With an annuity, savings grow, tax deferred, until withdrawn, with no restrictions on how much can be invested -- unlike an IRA or other retirement plan. And because an annuity is also an insurance product, it promises a guaranteed regular income after retirement, regardless of how long the investor lives. Sales of domestic annuities in the U. S. are now running around $50 billion per year. But the real reason for the growth is that as the American population ages, it is waking up to the fact that retirement self-sufficiency is an important issue. The annuity has some ideal characteristics for them. An annuity, often described as the opposite of life insurance, is a financial contract with an insurance company. These can be structured so they make regular monthly payments for life, no matter how long the recipient lives. While technically the investor doesn't own the investments the annuity makes, he benefits from their investment. And because he doesn't own the investments -- the insurance company does -- savings can grow, and the gains are tax-deferred. Just as with an IRA, no taxes are due on investment gains while the funds remain in the annuity account. This helps savings grow faster, and it allows individuals to better control when they will pay taxes. Taxes are due when money is withdrawn. Just as with an IRA or 401(k) account, withdrawal of funds before age 59 1/2 incurs a 10 percent penalty. While these investments do enjoy tax-deferred status as do other retirement accounts, individuals still get greater tax savings under traditional IRA or 401(k) plans, at least to the degree that contributions to those accounts are also tax deductible. But once beyond the level of what can be deducted, annuities are for investors who want to build substantial tax-free growth, not just be limited to a government-mandated maximum amount of savings. In an IRA or other retirement account, initial investments under certain limits are deposited before taxes. That allows wage earners to shield current income from tax, as well as allow investments to accumulate on a tax-deferred basis. With an annuity, the initial investment is made with post-tax dollars, although after that, investment gains are tax-free until withdrawn. This is a supplemental retirement tool, after all the other things. In an annuity one can set aside as much money each year as retirement or other future plans require. Other tax-advantaged plans such as IRAs should not be overlooked for retirement savings, but the amount that can be contributed each year is limited. Owning an annuity also can prevent some tax liability that often hits mutual fund holders. When a mutual fund is purchased, at the end of the year they pay a capital gains distribution, and even if they reinvest it, it is a taxable event. With a variable annuity, any profit made, as long as it stays there, grows tax-deferred. Other considerations in selecting an annuity include important safety questions, such as the financial health of the insurance company guaranteeing the investment. Because annuities are insurance products, the fees paid by investors are different than for mutual funds. Typically, there are no front-end load fees or commissions to buy an annuity, but there are "surrender" charges for investors who withdraw funds early in an American annuity, usually during the first five or six years. (This is not the case in the Swiss annuities discussed later.). The money in an annuity will grow much faster than in a taxable vehicle with a similar rate of return, for several reasons. Not only does interest accumulate tax-free until withdrawal, but funds that would otherwise have been used to pay taxes remain in the account for additional earnings. And by the time of retirement, the recipient is usually in a lower tax bracket, and will thus pay less tax on the annuity payments. Although salesman like to point out that an annuity's value is "guaranteed," that promise is only as strong as the insurer making it. An annuity is backed by the insurer's investment portfolio, which in America may contain junk bonds and troubled real estate investments. If an American insurer has financial problems, the investor may become just another creditor hoping to be paid back. For example, when the New Jersey state insurance department took over bankrupt Mutual Benefit Life, the state temporarily froze the accounts of annuity holders, preventing them from withdrawing money unless they could prove a significant financial hardship. Some American annuity marketers inflate their yields by playing games with the way they calculate them; others advertise sumptuous rates that have more strings attached than a marionette. The most widespread form of rate deception is the bonus annuity, in which insurers tack on as much as eight percentage points to their current interest rate. But many of these alluring bonuses can be illusory. In most cases the bonus rate is only paid if the annuity is held for many years, and then taken out in monthly installments instead of a lump sum. If the investor asks for the cash in a lump sum, the insurer will retroactively subtract the bonus, plus the interest that compounded on the bonus, plus a penalty on the original investment. Even more insidious are tiered-rate annuities -- so named because they have two levels of interest rates. They ballyhoo an above-average interest rate. But as with their bonus-rate cousins, the accrued earnings in the account reflect this so-called accumulation rate only when the payout is made over a long time. A straight withdrawal, by contrast, will knock the annuity down to a low "surrender value" rate for every year invested. Other insurers simply resort to the time- dishonored practice of luring customers with lofty initial rates that are lowered at renewal time. All of this nonsense has given the American annuity industry a bad name, and it is not surprising that most investors simply hang up the telephone when an annuity salesman calls. But the tax structure has much to offer, and it is worth shopping around. Long-term asset protection to beat the dollar -- tax- free According to Swiss law, insurance policies -- including annuity contracts -- cannot be seized by creditors. They also cannot be included in a Swiss bankruptcy procedure. Even if an American court expressly orders the seizure of a Swiss annuity account or its inclusion in a bankruptcy estate, the account will not be seized by Swiss authorities, provided that it has been structured the right way. There are two requirements: A U. S. resident who buys an annuity from a Swiss insurance company must designate his or her spouse or descendants, or a third party (if done so irrevocably) as beneficiaries. Also, to avoid suspicion of making a fraudulent conveyance to avoid a specific judgment, under Swiss law, the person must have purchased the policy or designated the beneficiaries not less than six months before any bankruptcy decree or collection process. The policyholder can also protect the policy by converting a designation of spouse or children into an irrevocable designation when he becomes aware of the fact that his creditors will seize his assets and that a court might compel him to repatriate the funds in the insurance policy. If he is subsequently ordered to revoke the designation of the beneficiary and to liquidate the policy he will not be able to do so as the insurance company will not accept his instructions because of the irrevocable designation of the beneficiaries. Article 81 of the Swiss insurance law provides that if a policyholder has made a revocable designation of spouse or children as beneficiaries, they automatically become policyholders and acquire all rights if the policyholder is declared bankrupt. In such a case the original policyholder therefore automatically loses control over the policy and also his right to demand the liquidation of the policy and the repatriation of funds. A court therefore cannot compel the policyholder to liquidate the policy or otherwise repatriate his funds. If the spouse or children notify the insurance company of the bankruptcy, the insurance company will note that in its records. Even if the original policyholder sends instructions because a court has ordered him to do so, the insurance company will ignore those instructions. It is important that the company be notified promptly of the bankruptcy, so that they do not inadvertently follow the original policyholder's instructions because they weren't told of the bankruptcy. If the policyholder has designated his spouse or his children as beneficiaries of the annuity, the insurance policy is protected from his creditors regardless of whether the designation is revocable or irrevocable. The policyholder may therefore designate his spouse or children as beneficiaries on a revocable basis and revoke this designation before the policy expires if at such time there is no threat from any creditors. These laws are part of fundamental Swiss law. They were not created to make Switzerland an asset protection haven. There is a current fad of various offshore islands passing special legislation allowing the creation of asset protection trusts for foreigners. Since they are not part of the fundamental legal structure of the country concerned, local legislators really don't care if they work or not -- the fees have already been collected. And since most of these trusts are simply used as a convenient legal title to assets that are left in the U.S., such as brokerage accounts, houses, or office buildings, it is very easy for an American court to simply call the trust a sham to defraud creditors and ignore its legal title -- seizing the assets that are within the physical jurisdiction of the court. Such flimsy structures, providing only a thin legal screen to the title to American property, are quite different from real assets being solely under the control of a rock-solid insurance company in a major industrialized country. A defendant trying to convince an American court that his local brokerage account is really owned by a trust represented by a brass-plate under a palm tree on a faraway island is not likely to be successful -- more likely the court will simply seize the asset. But with the Swiss annuity, the insurance policy is not being protected by the Swiss courts and government because of any especial concern for the American investor, but because the principle of protection of insurance policies is a fundamental part of Swiss law -- for the protection of the Swiss themselves. Insurance is for the family, not something to be taken by creditors or other claimants. No Swiss lawyer would even waste his time bringing such a case. Swiss annuities minimize the risk posed by U. S. annuities. They are heavily regulated, unlike in the U.S., to avoid any potential funding problem. They denominate accounts in the strong Swiss franc, compared to the weakening dollar. And the annuity payout is guaranteed. Swiss annuities are exempt from the famous 35% withholding tax imposed by Switzerland on bank account interest received by foreigners. Annuities do not have to be reported to Swiss or U.S. tax authorities. A U.S. purchaser of an annuity is required to pay a 1% U.S. federal excise tax on the purchase of any policy from a foreign company. This is much like the sales tax rule that says that if a person shops in a different state, with a lower sales tax than their home state, when they get home they are required to mail a check to their home state's sales tax department for the difference in sales tax rates. The U.S. federal excise tax form (IRS Form 720) does not ask for details of the policy bought or who it was bought from -- it merely asks for a calculation of 1% tax of any foreign policies purchased. This is a one time tax at the time of purchase; it is not an ongoing tax. It is the responsibility of the U. S. taxpayer, to report the Swiss annuity or other foreign insurance policy. Swiss insurance companies do not report anything to any government agency, Swiss or American -- not the initial purchase of the policy, nor the payments into it, nor interest and dividends earned. A swiss franc annuity is not a "foreign bank account," subject to the reporting requirements on the IRS Form 1040 or the special U. S. Treasury form for reporting foreign accounts. Transfers of funds by check or wire are not reportable under U. S. law by individuals -- the reporting requirements apply only to cash and "cash equivalents" -- such as money orders, cashier's checks, and travellers' checks. Swiss annuities can be placed in a U. S. tax- sheltered pension plans, such as IRA, Keogh, or corporate plans, or such a plan can be rolled over into a Swiss-annuity. Investment in Swiss annuities is on a "no load" basis, front-end or back-end. The investments can be canceled at any time, without a loss of principal, and with all principal, interest and dividends payable if canceled after one year. (If canceled in the first year, there is a small penalty of about 500 Swiss francs, plus loss of interest.) Although called an annuity, these plans act more like a savings account than a deferred annuity. But it is operated under an insurance company's umbrella, so that it conforms to the IRS' definition of an annuity, and as such, compounds tax-free until it is liquidated or converted into an income annuity later on. The most practical way for North Americans to get information on Swiss annuities is to send a letter to a Swiss insurance broker specializing in foreign business. This is because very few transactions can be concluded directly by foreigners either with a Swiss insurance company or with regular Swiss insurance agents. They can legally handle the business, but they aren't used to it. JML Swiss Investment Counsellors is an independent group of financial advisors. Since 1974 they have specialized in Swiss franc insurance, gold and selected Swiss bank managed investments for overseas and European clients. To date the group is servicing nearly 16,000 clients worldwide with investments through JML of more than 1 billion Swiss francs. Their services are free of charge to you because they are paid by the renowned companies with which you invest your money. Their commissions and fees are standard, and all transactions are subject to strict regulation by the Swiss authorities. JML represents the Swiss Plus program discussed in this book. All of their staff are fluent in English, and understand the special concerns of the international investor. They know about all the many little details that are critical to you as a non-Swiss investor, and have answers to your tax questions and other legalities. Contact: Mr. Jurg Lattmann. JML Swiss Investment Counsellors AG, Dept. 212 Germaniastrasse 55 8031 Zurich Switzerland telephone (41-1) 363-2510 fax: (41-1) 361-074, attn: Dept. 212. When you contact a Swiss insurance broker, be sure to include, in addition to your name, address, and telephone number, your date of birth, marital status, citizenship, number of children and their ages, name of spouse, a clear definition of your financial objectives (possibly on what dollar amount you would like to invest), and whether the information is for a corporation or an individual, or both.