Despite a recent pact between Switzerland and the United States to share tax evasion information, Swiss franc fixed annuities have been attracting a lot of U.S. dollars of late. Sources estimate that Americans have been putting about $2 billion annually into the Swiss insurance instruments, due to the falling dollar, inflation fears and the need to protect assets from creditors.
It’s no wonder. While U.S. fixed deferred annuities yield about 2 percent to 3 percent, Swiss franc fixed annuities have generated a total return of more than 8.5 percent annually over the past five years, according to Swiss Guard International, a Zurich-based brokerage firm. Of course, this factors in currency appreciation against the U.S. dollar.
“Our business and business of other Swiss brokers has increased,” says Darrell Aviss, Swiss Guard International managing director. “We have a lot of business people, professionals and doctors that are investing because they want to be protected from frivolous lawsuits.”
Whether this trend will continue is uncertain, however, after a number of Swiss banks have stopped accepting deposits from, or opening accounts, for U.S. customers, according to a July 21 article in The Wall Street Journal. Swiss insurance companies are being cautious due to the problems with UBS, a Swiss investment bank that had been under investigation by the IRS. The bank and the U.S government are negotiating a settlement. The bank was ordered to provide information to the IRS on about 52,000 U.S. clients who may have been involved in U.S. income tax evasion. The two countries agreed in June to fight tax evasion through information sharing. Nevertheless, the Swiss Government said it would not permit UBS to turn over the names.
As is well known, the Swiss have a tradition of secrecy when it comes to dealing with investors’ money. In Switzerland, there are no foreign reporting requirements or forced repatriation of funds. Under Swiss law, an annuity cannot be seized by any court-ordered collection procedures instigated by creditors.
Although Swiss franc investments may be attractive in uncertain economic times, only a fistful of insurance companies can issue fixed rate annuities to Americans. Among those: Pax Insurance, Basel; Generali-Life in Adliswil; Forces-Vives, Lausanne, and Swiss Life, Zurich.
Unlike U.S. fixed annuities, Swiss fixed annuities are not tax-deferred. A U.S. taxpayer owes taxes on both income and any foreign currency value appreciation. However, Swiss annuities are not subject to Swiss taxes. And they are exempt from the 35 percent withholding tax that Switzerland imposes on account interest received by foreigners.
Swiss franc fixed annuities lack the 10 percent penalty that U.S. annuities have on withdrawals before age 59 ½. Plus a Swiss-U.S. double taxation treaty eliminates the 1 percent U.S. excise tax on the purchase of foreign insurance products.
Swiss insurance companies are not currently required to issue 1099 interest and dividend forms to the U.S. IRS. Nevertheless, policyholders just report fixed annuity income and currency gains on their U.S. tax returns, based on IRS rule 1.1275-1.
Although more details need to be worked out, a recent U.S. Swiss agreement requires the countries to share information on potential tax evaders and could change the way taxes are reported. Leonard Witman, a Florham Park, N.J. estate tax attorney and Rutgers University law professor, predicts discussions between the United States and Swiss could lead Swiss insurance companies to issue IRS 1099 forms on U.S. accounts.
“The (tax) information between the U.S. and Swiss is going to be expanded tremendously," Witman says. “We [the U.S. government] can’t raise taxes, but they can raise revenue by increasing enforcement. The IRS is hiring new agents to raise revenue.”
For clients concerned about how the IRS views offshore investments, Aviss says Swiss variable annuities may be a better alternative. A Swiss variable annuity can be structured to adhere to U.S. tax laws, complete with IRS 1099 forms. The money grows tax-deferred in international mutual funds, fixed income and other investments, such as hedge funds.
Swiss insurance companies don’t publish information on U.S. dollars moving into Swiss investments.
Overall, 68.6 percent of total Swiss life insurance premiums, which tallied $125 billion in 2009, represent foreign money, according to a 2009 report by the Zurich-based trade organization, the Swiss Insurance Association. It is estimated that Americans have been putting about $2 billion annually into Swiss franc annuities since 2004 due to the falling dollar, inflation fears and the desire to protect assets from creditors.
Swiss franc fixed annuities pay a guaranteed rate of about 2 percent. The guaranteed rate is determined by the Swiss government bond rate when the annuity contract is issued. Annuity interest earnings are supplemented by profit-sharing dividends. Historically, the average annual dividend rate paid on Swiss Franc annuities has ranged from 1 percent to 5 percent. If the Swiss franc rises in value versus the dollar, total return is higher. Of course, the total return can drop substantially if the U.S. dollar rises in value.
Minimum initial investments in Swiss annuities range from $20,000 to $50,000. Account opening forms are sent to the Swiss insurance company via a Swiss brokerage firm. Swiss insurance company premiums are paid via international wire transfers.
A fee-only registered investment advisor can refer a client to a Swiss insurance broker, such as SwissGuard, JML or BFI Consultants, all Zurich, and Volcon in Zug for a negotiated referral fee. But most U.S. broker-dealers prohibit registered reps from accepting referral fees.
“Swiss francs are considered one of the world’s steadiest currencies,” Aviss says. ”Switzerland also avoids government deficits and the government unofficially backs its currency over 100 percent with gold bullion.” Swiss insurance companies, he says, are required to set up separate reserves to back 100 percent of their annuity obligations.
Estate planning attorneys often recommend Swiss franc insurance products to the well-heeled for asset protection. However, Swiss fraudulent conveyance laws have a one-year statute of limitations for property transfers, according to Jacob Stein, partner with Klueger & Stein, Los Angeles. Plus blanket asset protection under Swiss law applies only when the annuity policy incorporates an appropriate beneficiary designation.
Before wiring money overseas, Witman advises that financial advisors talk to a local attorney. Many state annuities already are protected from creditor claims. “A Swiss annuity is just another annuity,” he says. It has to be evaluated as an investment and the financial strength of the insurance company.”
Other caveats to investing Swiss annuities:
· Swiss annuities may come with back-end surrender charges if your client cashes out the annuity before maturity.
· Legal fees and court costs could prove extra costly and cumbersome if you ever have a problem with an insurance company outside the United States.
· Unlike in the United States, there are no independent rating agencies to help you judge a Swiss insurance company’s financial strength.