The US EB-5 Visa Program is an example of a "golden visa" regime, which a number of countries operate to attract investment. There are tax traps to consider, however, as this article explains.

The US, along with many other jurisdictions, has a visa programme aimed at attracting high net worth individuals, although these schemes are sometimes changed or suspended because of political or other considerations. The US programme is discussed here by Jay Judas, managing director and partner for Crown Global Insurance Group, a provider of investment-enhancement strategies and products for institutional investors, investment managers and ultra-high net worth individuals. The views expressed are those of the author and not necessarily endorsed by the editors of this publication, but we are delighted to share such insights. We are publishing this item here as it has global relevance.

In 2015, the US issued 9,764 EB-5 visas, with just over 83 per cent of the recipients being born in mainland China. Consistently, mainland Chinese have made up the majority of applicants and recipients for this popular visa programme. The next largest jurisdiction was Vietnam, with recipients receiving just 2.9 per cent of the visas.  

Why is the EB-5 Visa Program so attractive to the Chinese and what are the personal financial pitfalls to be considered?

In September 2014, a Barclays Wealth report revealed that 45 per cent of Chinese with at least $1 million planned to emigrate from China within the next five years. The most common destinations are the US and Canada, which have stable currencies, access to strong financial markets and a high quality of life in terms of healthcare and schools.   

In addition, the implementation of the Common Reporting Standard will mean that offshore wealth held by Chinese will become transparent to their government. This will most certainly lead to worldwide taxation as well as the enforcement of an estate tax. The concern is that the scope and level of taxation is uncertain, motivating the wealthy to seek residency elsewhere.

In the spirit of inviting immigrants to its shores as long as they are productive members of society and not a drain on resources, the US, in 1992, created a pilot version of the EB-5 Visa Program. If a foreign person wished to be fast-tracked to receiving a US Green Card, he or she could make an investment into the US that created jobs.

Today, the programme targets 10,000 EB-5 visa recipients a year who must make an investment into a new commercial enterprise which creates at least 10 full-time jobs. This investment can consist of either $1 million or $500,000 into a "targeted employment area" (TEA). 

A TEA is usually a depressed urban area or a rural community. Due to the lower investment requirement, more than 98 per cent of EB-5 visa investments in 2015 were made into TEAs.  

Golden ticket?
The EB-5 visa would seem to be the golden ticket for wealthy mainland Chinese seeking the security of the US. Once these EB-5 visa recipients become US persons for tax purposes, their global wealth is now subject to US taxation. Worldwide taxation on investment gains will likely seem trivial in comparison to the US estate tax, which can halve their wealth for the next generation.   

Unfortunately, most EB-5 visa investment vendors fail to mention the adverse tax consequences of permanent US residence. If not addressed through prior planning, US taxation can be a shock to someone whose past tax planning simply consisted of keeping money offshore outside of China.

Once a permanent resident, planning options are narrowed to those available to others in the US, and most likely include a standard life insurance solution purchased in an irrevocable life trust.

A better solution would be to not create a US taxable estate in the first place.  

The US government allows for a foreign person to gift unlimited amounts into the US. This is a shrewd allowance by the Treasury Department because once that money is in the US, it typically becomes a part of the recipient’s estate and the US knows it will eventually receive its share.

Prior to a foreigner planning to move to the US, they should consider moving their wealth into a US trust that keeps this wealth outside of their US taxable estate. The next step would be to purchase a life insurance policy inside of the trust to create tax-free death benefit and to defer taxation on investment growth inside of the trust.

As an example, let’s say that mainland Chinese resident Wei Chan is planning to apply to the EB-5 Visa Program and currently has $25 million with a bank in Hong Kong that he does not need to access for his day-to-day expenses.  

Prior to becoming a US person for tax purposes, Wei gifts all $25 million to a US irrevocable insurance trust. Inside of the trust, the money is used to purchase a variable private placement Frozen Cash Value (FCV) life insurance policy with an additional amount of death benefit risk of $1.25 million (or 5 per cent).  

Unlike a typical life insurance contract, an FCV policy allows for a very small amount of death benefit risk - typically just 5 per cent - for the policy proceeds to be US tax compliant and to be received tax-free. This allows for a great deal of wealth to be transferred outside of an estate while still preserving access to the basis in the policy, if needed.

Within the policy, the $25 million can be invested in a wide range of investment choices.

Wei’s planning has accomplished a number of goals. First, he has moved the $25 million outside of his future US taxable estate. Inside of the irrevocable life insurance trust, the cash value remains “frozen” at $25 million and all investment gains are treated tax-free. The value of those gains are added to the amount of the death benefit with no additional insurance costs. 

This private placement life insurance policy is compliant under US tax law with the proceeds being tax-free. In addition, the $25 million basis can be accessed within the trust tax-free and loaned to Wei by the trustee.

While there are minor nuances to this planning not discussed here, the result is that a combination of prior planning and a structured life insurance solution can save an EB-5 visa recipient from losing half of their wealth to taxation. More EB-5 applicants need to understand that the true price of an EB-5 visa can be a lot more than the programme investment.  

Author biography:

Judas focuses on expanding key partner relationships throughout the Americas, Europe, Asia-Pacific, the Middle East and the Caribbean. He previously served as the senior vice president and chief distribution officer for Old Mutual’s Bermuda company and, most recently, as the senior leader for the life insurance and investment subsidiary of the publicly-traded BF&M Insurance Group, the Bermuda insurer. A graduate of Rutgers University School of Law-Camden, he also holds a Master of Science in leadership from Northeastern University. 

Crown Global maintains offices in North America, Switzerland and the Cayman Islands. The business was founded in 1998.