Does Assurance Vie make sense for Americans? No, stay away!
Assurance Vie is a French investment program wrapped in a life insurance policy for French residents (it also exists elsewhere such as in Luxembourg). The investments are typically invested in a choice of mutual funds and you usually pay a commission to the seller of the product of between 1% – 1.5% per year plus the cost of the funds. You can add or subtract money as needed and holders have two primary benefits. First, like a 401k program or an annuity, there is tax-deferral meaning that any earnings from the investments are not taxed until they are withdrawn. If you hold the investment product for more than 8 years, you can also take advantage of a preferential rate of tax on those gains with a certain amount being tax-free. The program was created to encourage French citizens to save for retirement. Second, as a life insurance policy you can designate your beneficiary in the event of death, thereby bypassing the French inheritance rules which favor the children over the spouse. In France, Assurance Vie is sold by brokers and banks and is very popular. Most of the investment options are based on diversified mutual funds, where depending on your choices, can have some combination of stocks and bonds (with management fees deducted). Some programs of Assurance Vie offer a savings product, like a bank savings account, although the rates offered are historically very low, even lower than bank savings products such as the Livre A. Very little consideration by purchasers normally goes into the investment products, whose costs are quite high, as all of the sales focus tends to be on the tax benefits. The program works best if you defer distributions until the age of 70 when distributions may even be tax free although early withdrawals are treated as a return of capital.
While Assurance Vie has tax deferral benefits in France, unfortunately for US citizens those benefits are not recognized by the IRS. So, the growth within the Assurance Vie while deferred in France is still taxed in the US, meaning you don’t get the primary benefit of tax deferral. And it just gets worse. Assurance Vie are taxed by the IRS based on whether the investments are considered a PFIC or not. If they are a PFIC, then you may get some tax deferral, but you will ultimately get hit with an excess distribution PFIC tax at the time of distribution. This means that instead of a US citizen who is normally taxed at a 15% long-term capital gain rate on their taxable investments, they now be taxed a 39.6% tax rate even if they aren’t in the highest tax bracket. Further, the IRS will also require you make interest payments for each day that the investment was held. Thus, once you calculate the highest tax rate and multiply it by several years, in addition to multiple years of interest payments, the overall rate can actually reach more than 75% and this doesn’t consider what you will have to pay to your accountant to figure it all out. If the chosen investments are not considered a PFIC, you will have to pay taxes in the US during each year the income accrues, but at ordinary income tax rates, not more favorable capital gains, even if the investment has not been sold.
And it keeps getting worse, because the tax reporting is not done by the insurance company for us citizens. Therefore, you are responsible for keeping an accounting of every single entry, whether dividends, capital gains or distributions. This lack of US tax reporting is one of the most serious problems facing Americans when investing with French institutions. The Assurance Vie is also reportable on the FBAR and on FATCA form 8938.
The key for all investors is to obtain the maximum after-tax return in consideration of risk tolerance. Besides all of the reporting and tax filing, Assurance Vie will never be the investment vehicle to do that.
2 December 2022