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Why & How, You Should Diversify Your Assets Internationally Out Of The U.S. Dollar!

November 17, 2004

The United States federal deficit is ballooning wildly out of control. The deficit is threatening to sabotage the economic recovery… destroy the U.S. dollar… and turn your financial future upside down. From our perspective, the U.S. dollar is due for another profound correction, and may turn into a vicious trap for those unprepared. Therefore, we would like to share with you in detail one of the safest and most profitable strategies that we have discovered and reviewed thoroughly during our travels overseas.

WHY CURRENCY DIVERSIFICATION MATTERS

Today, more than ever, it is recommended to look for solid strategies to diversify your assets overseas - out of the Dollar and out of the country. The US dollar, after its latest rallye, is now clearly back in its long-term down-trend and the bear market that started in 2001. Since then the Greenback has lost roughly 50% of its purchasing power versus other world currencies. The following graph depicts the US dollar versus the Swiss franc since 1971.

Typically, wealth preservation strategies allocate a portion of a portfolio's assets to corporate bonds, government bonds or money market funds. A key aspect overlooked in these strategies (or, should they be called tactics) pertains to foreign currency exchange rate fluctuations and their impact on PURCHASING POWER.

Unfortunately, the concept of retaining purchasing power is often perceived as simply investing in assets that outperform domestic inflation. The common notion is that as long as the yield on any given investment is higher than the rate of inflation - generally understood as the percentage change of the domestic consumer price index (CPI) - then the purchasing power of your assets will be retained. This conclusion is inprecise and flawed in at least two ways:

First of all, the official 'rate of inflation' is an average number calculated for a theoretical basket of goods and services that reflect the assumed standard consumption pattern of a typical household of any given country. Most people do not fit this "typical" profile. Depending on one's specific situation, life style, age or financial capacity, the level of applicable and relevant inflation will differ substantially from the official growth rate of the CPI. For instance, a young family looking for a house in California will quickly notice that the overall cost of living has increased substantially over the past years - far beyond a supposedly "low" US inflation rate.

Secondly, the aforementioned perspective erroneously assumes that as long as you invest in your home currency, you will not be exposed to currency risk. This misconception is a primary reason for many people not to invest internationally at all.

In fact, a lack of strategic international diversification INCREASES your risk exposure! At certain times, not diversifying internationally will not only lead to higher "home-country" risk but also decrease the level of capital gains opportunities and overall return in your portfolio, thereby DIMINISHING your purchasing power!

WHAT ARE YOUR OPTIONS?

Diversifying internationally, may not necessarily mean that you have to send your funds overseas. Obviously, there are some U.S. mutual funds that invest in assets overseas. Then, there are some banks that offer foreign currency accounts, or foreign denominated certificates of deposit. However, these strategies do not offer the kind of protection that we recommend in view of today's economic and political situation,

We prefer a solution that offers a higher level of protection and flexibility. Most importantly, you should be looking for the following objectives:

  • Eliminate or at least minimize taxation for assets under management
  • Pass on wealth in a flexible, efficient and tax-favored manner
  • Build your personal wealth plan in total privacy and confidentiality
  • Obtain solid asset protection based on fundamental Swiss or Liechtenstein law
  • Benefit from truly global investment access and flexibility o Take advantage of professional and individually tailored asset management services
  • Enjoy supreme safety and service quality based on the employment of only the very best custodian banks and insurance carriers
  • Do it all in a private BUT compliant manner

IN SEARCH OF SAFETY AND VALUE?
CONSIDER A NEW BREED OF ANNUITIES MADE IN SWITZERLAND!

We have come across only one investment that provides all of the aforementioned benefits in one attractive and cost-efficient form: annuity policies made in Switzerland and Liechtenstein.

Over the past twenty years, offshore annuity policies have grown increasingly popular to investors around the world as the advantages became better understood. In particular, investors from countries with unstable political or highly litigious systems have sought safety in the various forms of Swiss annuities. Beyond safety, international investors now also appreciate recent innovations related to improved investment flexibility.

With no doubt, we consider single premium Swiss annuities to be amongst the most attractive programs offered world wide to conservative, long term oriented investors seeking peace of mind for a part of their assets.

For Americans, properly structured Swiss and Liechtenstein annuities provide a multitude of attractive features. For one, they can provide the advantage of tax deferment. This brings with it the advantage of compliant non-reportability. If you check the U.S. Treasury department forms and IRS forms, you will notice that any offshore account, trust or foundation must be reported. Foreign life insurance policies and annuities are not reportable. If structured properly, you only need to report and pay taxes upon withdrawal of funds, but not as long as your assets grow within the policy.

THE MULTI-CURRENCY SWISS ANNUITY

The most commonly used version of overseas annuities is the multi-currency Swiss annuity policy. Issued by only the safest insurance companies in the world, it offers a guaranteed return plus dividend sharing for life. This product provides one of the most cost-efficient and safe currency diversification vehicles available today. The more advanced policies offer currency switching in up to 8 different world currencies: Swiss francs, Euros, Australian Dollars, New Zealand Dollars, Canadian Dollars, Norvegian Krona, US Pounds and US Dollars.

This feature allows the investor to denominate a policy in up to 8 different currencies and switch those currencies when perceived beneficial. Carriers of other countries do not allow for denomination of policies outside of their domestic currency. Particularly in current markets, with various dollar-linked currencies depreciating rapidly versus the Euro or the Swiss franc, such limitations create substantial risks for the investor locked into the "wrong" currency.

If you have a bank account and convert one currency to another, the bank will charge conversion fees plus, it will make a nice profit on the spread of the two currencies. Depending on the bank and the size of the transaction, you may face a very intransparent conversion spread of sometimes up to 3.5 %! Not so with the Swiss multicurrency annuity certificate. A fixed fee of 300 Swiss francs is charged for each currency switch.

"NEW ERA" ANNUITY POLICIES

Most people buy annuities so that they will have a constant source of income during retirement. However, annuity policies around the world have moved far beyond that scope. With one third of global private wealth deposited with Swiss financial institutions, many of the world's leading investment managers are employed by Swiss institutions.

Equally, in Switzerland the merging of banking and insurance services in search of innovative solutions is more advanced than in other countries. It should therefore not surprise that Swiss and Liechtenstein carriers offer a variety of services not found elsewhere.

There are various investment structures that allow for tailor-made solutions providing the necessary elements of an adequate wealth preservation plan. Yet, they integrate various features that enable continuous investment flexibility and substantial capital gains potential without exposure to prevailing stock market risks. Here are a few examples of such products that we found most interesting.

Annuities with discretionary managed accounts

So to speak the de-luxe version of products we came across, this kind of personally tailored annuity certificate allows you to define a personal investment strategy with a number of first-class asset managers. Instead of the insurance company managing your funds, the asset manager manages the segregated account of you policy according to your personal specifications. You can imagine the multitude of creative strategies you have always wanted to implement in a tax deferred and protected manner. It is now possible.

These investments are sometimes called insurance wrappers, since they essentially allow inclusion of banking services and unique asset allocation models in an insurance policy, thus being "wrapped" or sheltered in the policy. This enables the investor to obtain a tailor-made investment plan that can rapidly accommodate for critical changes in market trends, such as we are witnessing now, without leaving the shelter of the insurance policy.

Another noteworthy feature here is that you can insert existing portfolios into the policy. Thus, you needn't pay in cash. And, if you find the timing inopportune, you needn't sell your existing assets to apply for a policy. Some policies will even allow you to insert private equity and precious metals.

Swiss Precious Metals Annuity Certificate

You will be interested to learn that there is now an annuity solution available that was created by a group of Swiss financial services experts. The annuity allows you to invest in a personally tailored mix of precious metals - both physical and in form of diversified mining shares. One product we examined allows you to choose your preferred mix of (i.e. percentages defined by you):

  • a Swiss physical gold storage plan,
  • an Australian government-guaranteed precious metals certificate (gold, silver, platinum),
  • a selection of internationally acclaimed funds in the area of mining shares, natural resources and commodities, including the Timeless Precious Metals Fund managed by Zihlmann Investment Management, and
  • liquid foreign currency investments, such as short-term UK gilts or Swiss money market claims.

Profit-guaranteed annuity policies

Some annuity policies we found allow the policyholder to take part in funds that offer capital guarantees of even profit guarantees. Generally, the guarantees are offered with maturity dates of some 8 to 10 years, meaning that you are subject to market risk if you surrender before the maturity of the policy.

The most interesting version of a policy was one that was built on the basis of the S&P Hedge Fund index and offered a highest value profit guarantee. Thus, if you wanted to take part in a highly diversified fund of hedge funds, and if you wanted to ensure that you cannot loose your principal and retain the highest level the fund every reaches, this annuity policy offered that feature. This specific policy is not yet available, but expected to hit the market early next year.

SWISS ANNUITIES COMPARED TO OTHER OFFSHORE INVESTMENT VEHICLES

When discussing Swiss annuities one must also compare them to other frequently sought offshore investments or structures. It can not be the objective here to present a detailed and complete comparison. Equally, we by no means intend to belittle the value of other offshore structures. We would like to simply point out a few key benefits Swiss annuities offer, which deserve consideration before opting for more complex and costly structures.

Swiss annuities, similar to trusts, provide for integrated estate planning capability through flexible beneficiary designations. Furthermore, a variety of deferment options and payout modes allow for individually tailored investment solutions not readily available otherwise.

Swiss annuities are also well suited for making distributions separate from the policyholder's estate. Neither a power of attorney, nor a last will or certificate of inheritance is required for payments to be made upon the owner's death. Beneficiaries obtain immediate access to the funds according to the payment method chosen by the policyholder.

Swiss annuities are free from Swiss taxes. If, however, the investor accumulates Swiss francs through other types of investments, he or she will be subject to the 35% withholding tax on interest or dividends earned in Switzerland.

Swiss annuities are not subjected to the issues related to recent QI (Qualified Intermediary) arrangements and U.S. withholding tax regulations encountered by banks around the world.

While banks around the world are forced to compromise on the confidentiality of U.S. persons, insurance contracts are shielded from such influences.

ASSET PROTECTION

In some countries, the risk of expropriation is prevalent, that is when assets located in a given jurisdiction will simply be seized by the government. In other cases, property rights such as forced heirship, or spousal rights under statutory schemes of divorce and probate, may be perceived as a threat to assets. In general, however, predatory litigation is the number one risk factor. We Americans in particular need to be aware of the risks that arise from a system of litigation that encourages plaintiffs to sue wealthy individuals and firms.

Although domestically life assurance policies and annuities are accorded a preferred status in various states, even for investors from states with such provisions, the specific laws tend to be complex and to change frequently. For most people, the complexities of offshore trust solutions for asset protection can be a daunting task. Investors need to do a lot of homework to find the right offshore trust domicile for their needs. They have to know the privacy tax, and fraudulent conveyance rules applicable as well as the legal framework for trusts. These vary with every domicile.

As difficult as it may appear, placing assets in a foreign jurisdiction may be the only way to protect them effectively from the aforementioned dangers. Moreover, choosing a jurisdiction that treasures privacy and honors property rights provides a higher level of comfort and security. Quite naturally, Switzerland's long tradition of privacy and safety is extended to annuities. Asset protection in Switzerland and Liechtenstein (which has largely adopted the laws of Switzerland) is first and foremost an accepted and fundamental legal principle.

Swiss law ensures that insurance policies, including annuities, cannot be seized by creditors or by fraudulent and predatory plaintiffs. Two requirements are essential. First, the purchaser of a life insurance policy from a Swiss insurance company must designate his or her spouse or descendants as beneficiaries, or a third party if done so irrevocably. Second, to avoid suspicion that the policy was bought to circumvent a specific judgment, under Swiss law, the investor must have purchased the policy or designated the beneficiaries not less than twelve months before any bankruptcy decree or collection process. Liens may not be attached to the annuity in any way.

Thus, the investor is assured that the wealth contained in his or her annuity cannot be touched by any individual or government agency, and that the funds in his or her annuity will in fact go to the designated heirs. In this sense, a Swiss annuity is comparable to an offshore trust solution, only that the setup and administration is much easier and generally less costly. It is noteworthy also that in some cases a combination of the two can be beneficial.

A trust - or other legal entity for that matter - can be the owner or the designated beneficiary of a life insurance policy.

CONFIDENTIALITY AND PRIVACY

For obvious reasons, particularly since September 11th of 2001, "privacy" is one of the fastest-growing motivations for the use of foreign insurance and banking mechanisms. The legal and technological restraints on collection of private data are being eliminated one by one. The drive toward complete "citizen transparency" is rampant in western nations and supported by socialist lust for global tax harmonization.

Perhaps the biggest misrepresentation in the area of privacy is based on the notion that those who seek privacy have something illegal to hide. Most clients seek privacy not to conceal illegal activities, but for specific personal reasons or simply because they are uncomfortable with a broad range of people having knowledge of their financial status.

Being a contract - and not an entity - an insurance policy is not a juridical creature. Its existence is generally not reflected in any public records. It is a "portable" device and does not require recording at any governmental branch or agency. Moreover, in many jurisdictions, during the accumulation (or "internal buildup") phase of the insurance contract, no taxes are paid and, hence, no reporting required.

Add traditional Swiss discretion and secrecy laws to the mixture portrayed above and it becomes very clear why a Swiss annuity policy is rated high on privacy. As with all their financial transactions, the Swiss elevate privacy to a priority. It goes without saying that Swiss insurance companies will not report any client and purchase information to any government agency in Switzerland or abroad.

PRODUCT VARIETY AND FLEXIBILITY

The multi-currency capability of Swiss annuities is only one example of such flexibility. Based on the very restrictive regulatory environments found in jurisdictions such as Canada, Japan and the United States, domestic investors are generally not aware of foreign offerings.

In fact, many of the largest and best insurance companies have explicitly decided not to do business in such jurisdictions. The respective regulations are said to "protect" domestic investors from the risky exposure to foreign financial services. It is however conceivable that such regulations do not protect anyone but the domestic industry and its constituents.

With thousands of insurance companies worldwide it is quite logical that in such jurisdictions, most of the potential choices are to be found elsewhere. It may therefore be worth looking "over the fence" for some better opportunities.

Indeed, free access to global investments and "offshore" services is quite possibly the most important reason why the wealthiest investors have sought offshore solutions for many years.

PRODUCT COSTS

There are many factors that impact on the particular cost structure of any given insurance policy. Generally speaking, the pricing of insurance products will be impacted by the direct and indirect costs borne by the insurance company.

Switzerland, being a low tax jurisdiction with a comparably slim but very effective set of financial service regulations, maintains a fairly efficient insurance system with competitive prices.

Furthermore, it is critical in this context to consider insurance products from a total cost perspective. U.S. carriers for instance, apart from entity-level taxation, are subject to a so-called deferred acquisition cost (DAC) tax as well as further applicable premium taxes charged in some states. Such costs are unknown in Switzerland.

No Anglo-Saxon-style up-front costs exist. The establishment fees of Swiss insurance policies are generally spread over a period of 5 to 6 years, whereby an equal portion is debited annually during that period. Should you decide to surrender after say 2 years, only 2 of the establishment fee installments will have been paid.

Finally, if you surrender a Swiss annuity before the end of the agreed accumulation period, no surrender penalties (or so-called restitution fees) are charged. Only during the first year of your contract you will be charged a small fixed administrative fee. Thereafter, no additional surrender penalties exist.

CONCLUSION

In conclusion, although most investors have heard of Swiss annuities, many do not realize the manifold planning opportunities and flexible means of combining safety and growth that these investments offer.

Overall, Swiss and Liechtenstein annuities, and other forms of life insurance policies, allow policyholders to realize higher investment returns than traditional life insurance products while maintaining solid benefits related to asset protection and taxation. In addition, all life insurance products offer a variety of other planning options, such as irrevocable life insurance trusts or private split-dollar plans.

Given the size of a typical annuity investment, and the variety of options available and issues involved in selecting the right product and company, be sure to discuss the overall possibilities and related ramifications with a competent and knowledgeable financial adviser or tax attorney.

If you need further advice, contact us at the address below. The expert will get in touch with you as quickly as possible.

Peter Zihlmann

www.pzim.com
[email protected]
[email protected]


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