Asset management in private wealth management

The FLV-jacket as a highly interesting tool for asset structuring and optimization from a tax and inheritance planning perspective


The advisor of private wealth clients should know the advantages of investing abroad. Of central importance are discretion, creative flexibility, as well as banking and insurance secrecy.

Income taxes
Inheritance Taxes
Withholding taxes
individual foundation light
post-mortem allowance

Transparent tax citizen?

Not only can the tax authorities obtain information on all investment income in Germany, but data is also constantly being transmitted from abroad. Domestic and foreign reported data are available to both financial and social security institutions as control reports. However, all deposit assets housed in an FLV shell as well as the resulting income are not reported: The deposits and cash accounts are in the name of the insurance companies. The same effect can be achieved by transferring the assets to a managing AG, GmbH, foundation or trust.


asset wrapper

If the investor transfers money or securities into an FLV insurance jacket, for example, this is first and foremost asset management according to customer requirements. The income from the capital is tax-free as long as the assets remain “packed” in the FLV construction. One reason why the model does not work with German providers is that there are strict requirements in Germany for the investment of capital in life insurance policies.


Control in case of inheritance

In Germany, banks report all assets in accounts and custody accounts to the inheritance tax office. From there, control reports are then sent to the deceased’s tax office of residence. The heirs are obliged to correct their tax returns in the event of incorrect information on assets and income, both at home and abroad (§ 153 AO).



The Wall Street Journal of 15-16 July 2006 lists four main reasons for protecting an “iron reserve”: litigation, creditors, and separation and divorce. But typical basic strategies for asset protection are also addressed.


Risk separation

The practitioner says “Any steel door through which an opponent has to weld his way is helpful”. Here it is useful to know special concepts and the special insurance conditions and solutions of international providers.


The FLV insurance jacket

The designation as FLV-jacket could suggest that only something is “wrapped up” here. However, upon payment of the premiums (as cash or securities), ownership is transferred to the special assets of the insurer – later on, insurance benefits are paid. The special feature is the greater flexibility of the shell, the investment strategy and the freedom to select assets, including unlisted funds or securities. A typical case of use is in inheritance planning, for example, when it comes to protecting children from themselves. The parents’ concern is that a fortune will fall into the hands of their offspring too early and too quickly – and the fear that their children will not yet be consolidated and will be in the wrong circles. Here, too, there may be an irresistible need for anonymity – alongside the possibility of more flexible legal arrangements.

Example Income Taxes: Comparison of a bank deposit with a shell concept

A testator owns a securities account with a value of 1.0 million euros, the net interest rate should be 5%, the personal income tax rate is 42%, the inheritance and gift tax rate is assumed to be 15%, life expectancy is assumed to be 15 years. Furthermore, an acquisition fee for the FLV of 5% and 1% ongoing administration costs of the insurance jacket are assumed.


(a) Bank deposit:

The bank deposit (1.0 million) is growing by 5% net p.a., after costs and taxes. After 15 years it reaches a value of 1,535,432 euros. This value then becomes the basis of assessment for inheritance taxation. In the event of inheritance, the value is reduced by the taxes in the amount of 230,315 Euro, resulting in final assets after taxes in the amount of 1,305,117 Euro.


b) FLV jacket:

With the insurance shell (0.95 million after deduction of the acquisition fee), the assets also grow p.a. by 5% net, but without current tax burden. The significantly higher value reaches an amount of 1,698,600 euros after 15 years.


Example inheritance taxes: Comparison of the bank deposit with a shell scheme

If the life insurance policy is given away to the son during the term of the policy, only 2/3 of the paid-in premiums are currently taken as the assessment basis. With a 15% tax rate on 666,666 euros pro rata contribution to the insurance, 100,000 euros in gift tax is due. For the recipient, the deposit has reached a value of 1,698,600 euros after 15 years. After offsetting the gift tax, the final assets after taxes amount to 1,598,600 Euro. If the future heir has been agreed as the beneficiary in the FLV shell, in the event of his death the custodial assets accumulated up to this point in time will accrue to him free of income tax – as death benefit.


Comparison FLV Coats with classic endowment insurance, classic annuity insurance, unit-linked life insurance

– basically different structure
– lower costs + fees
– Transparency in costs and underlying assets
– Influence and design of the underlying asset
– Performance differences
– Flexibility and customizability


Compared to a normal unit-linked life insurance policy, the FLV shell can potentially show an increase in net performance of around 0.5-1.0% p.a. Since there is no current income taxation, the tax return is simplified. There is no withholding tax.


Individuality and cover pool

With the FLV cover, the customer transfers his existing deposit assets to the insurance company. The client can intervene in the selection of the asset manager and the bank. However, in order not to jeopardise recognition as a life insurance policy, the insurer should always determine the bank and the asset manager.


Tax exemption of the increase in value

The current capital gains in the FLV shell are not taxed – as in the case of a German KLV – as long as there is no withdrawal. This is because the legal and beneficial owner is the insurance company, which is exempt from the current taxation of the capital gains. There is therefore no interest discount. Only when withdrawals are made after partial terminations is the value of the fund compared to the contributions paid in order to calculate the taxable quota. Only half of the proportional increase in value in relation to the actual withdrawal from the cover pool is then taxed at the personal tax rate.


Retirement Income Act

Income from capital-forming and unit-linked life insurance policies is generally taxable. However, in the case of contracts with a term of twelve years or more and a payout from the age of 60, the income is “only” subject to half the tax. This applies accordingly to the removal from the FLV jacket.

Example: A life insurance policy for 1,500,000 euros is paid out. The income is 500,000 euros, and only this is taxed. Assuming that the insured person has the highest income tax rate of 42 percent from 2005: applied to half the income, 105,000 euros went to the state and 1,395,000 euros to the insured person.


Income taxes: Tax liability only when due or (partial) withdrawal

From a tax point of view, the decisive factor is that a duration of 12 years (and a final age of 60!) is aimed for. If the withdrawal or (partial) termination takes place before that date, the gains are fully taxable.


estate planning

Of much more interest for estate planning are the option of tax-free policy sale and income tax exemption on exit in the event of death. The speculation period applies to the sale of policies, so that after a holding period of one year, any profit from the sale remains legally tax-free.


Flat rate withholding tax falls

According to a current discussion of the legislator, the final withholding tax is to be reduced to 30% and 25% in 2008 and 2009 respectively. At present, it is to be assumed that an analogous treatment to that of income taxes will be applied. A wrapped securities account has a clear advantage over a classic securities account.


Depot access

The terminability of the FLV depends on the contractual agreements, which can be kept very flexible. The cancellation discounts conceivable with “normal” life insurance policies, problems due to zillmerisation, too low surrender values, a market price adjustment, or notice periods with several years’ notice, do not exist with this model.


Estate planning with foundation character

While the classic bank deposit is taxed at current market value, the usually lower 2/3 value (in the case of transfer of assets with maturity in the event of death) of the contributions paid can be used for inheritance tax purposes. The maturity of the policy can be delayed by appointing several policyholders, giving the FLV a kind of foundation character, and additional allowances can be used.

Post-mortem allowance

In the event of inheritance, the heirs only have their personal allowance once (§ 14 ErbStG). The available liquid assets are then taxable. As is well known, the tax-free amounts among the living are available again and in full every 10 years through repeated donations. This can be repeated every 10 years even after the death of the testator by his heirs. The prerequisite is that the claim is not or will not become due at the time of death. The lawyer speaks here of an “aged claim”.


Bottom line:

The FLV cover for securities assets is an attractive instrument for provisioning for life (asset protection) and for succession planning (post-mortem allowance).


by Dr. Johannes Fiala


with friendly permission of

published in finEST planner report issue 03/2006


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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