The Step Journal, December, 2006
by Maehala R. Nathan and Marco Gantenbein1, Swiss Insurance Parnters AG, Zurich/Switzerland
Swiss Annuities are an attractive alternative to structures such as asset protection trusts and foundations, which are often more complex, more costly and less secure. An annuity is a contract sold by an insurance company that is designed to pay an income for life or over a specified period of time, or a lump sum. It generally involves four parties: the insurance company, the policyholder, the insured person and the beneficiary.
The policyholder enters into a contract with the insurance company and receives cover for themselves and/or other beneficiaries in return for either a lump-sum premium, regular premium payments or a combination of both. The policyholder may be a legal entity such as a company or foundation, or a trust. The insurance policy covers the life of the insured person. The latter may be, but need not be, the same person as the policyholder, but it must be a physical person.
The beneficiary is designated by the policyholder to receive the specified capital or an-nuity payments. The beneficiary can also be a legal entity or a trust and need not be a physical person.
Strong asset protection
One of the most important advantages is the unique asset protection offered by Swiss annuities. Although asset protection is particularly relevant to clients with US exposure, successful individuals and families around the world are increasingly seeking to protect their assets from unjustified lawsuits and claims. Swiss annuities are ideal vehicles for clients needing simple but extremely effective asset protection.
Anyone may purchase an annuity policy from a Swiss insurance company and designate their spouse and/or descendants as beneficiaries, or irrevocably designate any other third party (such as a legal entity or a trust) as a beneficiary. Swiss law then protects the annu-ity against any attempts by debt collectors commissioned by the policyholder’s creditors and safeguards it from any bankruptcy procedures.
Importantly and very relevant in practice, where a spouse and/or descendants are desig-nated as a beneficiary, and not some other third party, it is irrelevant whether the desig-nation is irrevocable or revocable. The insurance policy will continue to be protected from the policyholder’s creditors even if the designation of beneficiaries is revocable.
Creditors may seize the policy or have it included in the estate of the bankrupt party only if its purchase or the designation of the beneficiaries is a fraudulent conveyance in the sense of article 285 et seq. of the Swiss Debt Collection and Bankruptcy Act. This is the case where the policyholder has designated the beneficiaries less than a year before the initiation of debt-collection proceedings ultimately leading to a bankruptcy decree against the policyholder or to the seizure of the latter’s assets. The same applies if the beneficiary was designated with the clear intent to damage the creditors or to treat some of them preferentially and the designation was made within five years of the date of debt-collection proceedings resulting in a bankruptcy decree or the seizure of the policy-holder’s assets.
At the expiry of the insurance policy, the policyholder can as a rule collect the proceeds accruing from the policy, extend the existing policy or roll the proceeds over into a new policy.
A policyholder who becomes bankrupt continues to be protected as ownership is auto-matically transferred to the beneficiaries. Any instructions forced upon the original poli-cyholder must now be ignored; only the latter’s beneficiaries, as the new owners, may now instruct the insurance company.
Swiss protection
According to Swiss law, the rights under an insurance contract between a foreign person and a Swiss insurance company refer to the latter’s domicile. But if the policyholder’s and beneficiaries’ rights are embodied in a policy, a creditor could claim seizure of the latter in accordance with the debt-collection and bankruptcy rules of the country in which it is deposited, as insurance policies are normally subject to the relevant laws of the country where they are deposited. Fortunately, this situation does not arise if the insurance policy is deposited in Switzerland. This can be done conveniently by renting a safety deposit box at any Swiss bank, or by depositing the policy with a Swiss fiduciary.
All debt-collection and bankruptcy procedures located in Switzerland are based solely on Swiss bankruptcy rules. This means that life insurance policies are protected by Swiss law even if the debtor would not be protected by the debt-collection or bankruptcy law of his/her domicile. In fact, only the Swiss rules on fraudulent conveyance apply in this case, so creditors cannot avoid designating beneficiaries unless they prove that the con-veyance had been fraudulent. This even applies when the purchase or designation was a voidable preference under the rules relating to fraudulent conveyance applicable in the debtor’s domicile.
This leads to the interesting fact that the creditors of a non-Swiss resident may not seize any life insurance policies that are protected under Swiss law or include them in the bankrupt’s estate even if a relevant judgment or bankruptcy decree is enforceable in Switzerland. The only exception is if they can prove that the designation of the policy’s beneficiaries is a voidable preference under the Swiss rules relating to fraudulent con-veyance.
A foreign court may order a policyholder to revoke a past beneficiary designation in order to include the relevant assets in the foreign bankruptcy estate. The policyholder may then comply with such an order or judgment by informing the insurer that he or she revokes this designation. It then remains to be seen whether, under Swiss law, the insurer has to comply with an instruction forced upon the policyholder by a foreign judge or court. If a third party has been irrevocably designated, an insurer will not comply with the policyholder’s instruction because this would contradict this irrevocability status.
If an Swiss annuity is purchased in the process of overall asset protection planning (and not as a last resort to hide assets from known creditors, in which case protection is not available under Swiss law), then such a simple act of purchasing a Swiss annuity pro-vides extremely strong asset protection that has been tested several times in Swiss courts and has without an exception always held up.
Swiss Annuity v Asset Protection Trust - a comparison
| Asset Protection Trust | Swiss Annuity | |
|---|---|---|
| Owner retains full control | No | Yes |
| Privacy | Yes | Yes |
| Foreign jurisdiction | Only if trust assets are not invested locally | Yes |
| Liquidity | Depending on the trustee's investment decistions | Yes |
| Tax-free locally | Variable, depending on trust domicile | Yes |
| Established legal principles | Variable, depending on trust domicile, location of trustees and trust assets | Yes |
| Simple and inexpensive | No | Yes |
One of the safest investments
Besides the asset protection offered, Swiss annuities are also extremely safe from an investment point of view. Capital and returns (in case of a fixed annuity) are guaranteed – and here you can read the word “guaranteed” with its full meaning. No Swiss insur-ance company has ever gone bankrupt, failed to meet its obligations or otherwise been forced to close. This track record is unique in the world. In the United States, for exam-ple, several major life insurance companies have failed or gone bankrupt. And Equitable Life, Britain’s – and probably the world’s – oldest life insurer and once one of the proud-est names in the industry, had to close its doors to new business in the year 2000. The situation in Switzerland is quite different. The government regulates all Swiss insurance business by enforcing the strictest regulations in the industry. Life insurance companies are obliged to maintain a security fund to cover all their obligations plus an additional security margin. This fund is kept separate from the company’s operating assets and are thus protected, in a similar way as trust assets are in relation to the trustee, in the (ex-tremely unlikely) event that the Swiss insurance that issued the policy were ever to file for bankruptcy. This is an important difference from regulations in most other countries where the funds of policyholders are mingled with the insurance company’s other assets, and this little difference provides policyholders of Swiss insurance companies with the utmost safety and protection.
Other advantages
Swiss annuities often offer tax-planning benefits in addition to the investment safety and the unique asset protection. As forms of investment, customized insurance policies can bring tax advantages such as significant relief from income, capital gains and inheritance tax. Moreover, the capital accumulated in life insurance policies is not taxed in several countries when the policy expires, or then only at a very low rate. To benefit from any tax advantages, an annuity policy must obviously comply with the tax regulations in the policyholder’s country of residence (i.e. the location of his/her main tax residence). Thus a certain minimum duration may be required, or the insurance must include a certain amount of life cover in addition to the investment component.
Another important advantage of Swiss annuities is that they offer instant liquidity. All capital, plus all accumulated interest and dividends, is freely accessible. Depending on the type of annuity, a minimal withdrawal penalty applies only to an initial period, usu-ally up to one year. So a policyholder may withdraw urgently needed funds, as they are not tied down for a fixed period of time. And all Swiss banks are happy to accept Swiss life insurance policies as collateral for loans. Funds can then be mobilized quickly if needed even without making a withdrawal or cancelling the policy, by simply pledging the policy and taking a loan from a Swiss bank.
The Swiss insurance industry’s impeccable track record and sophisticated products - particularly annuities - are attractive to international clients on several counts: they are an extremely safe form of investment that includes unique asset protection. This is par-ticularly relevant to American investors and increasingly so for wealthy people else-where in the world who wish to safeguard their assets legally. Depending on the inves-tor’s specific situation, investments in Swiss annuities may also offer tax advantages. All these benefits are available in the globally unrivalled environment of legal and economic stability offered by Switzerland.
1 Maehala R. Nathan is a Senior Consultant and Marco Gantenbein the Managing Director of Swiss Insurance Partners AG, Zurich/Switzerland