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From Malta with Love


By the Magnus Advisory Team

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Nestled south of Sicily and covering just 122 square miles, Malta is among the smallest island nations in the world. It’s home to the seven Megalithic Temples, among the world’s oldest free-standing structures – with some dating back to before the Egyptian pyramids and the stone structures of Stonehenge. The crystal-clear waters and lush landscapes also made it the backdrop of several James Bond movies, including The Spy Who Loved Me and For Your Eyes Only.

Even with its small size and ancient history, Malta stands as one of the most progressive financial centers in the world. After entering the eurozone in 2004, it has created a world-class information and technology infrastructure combined with an advantageous tax regime backed by numerous double-taxation agreements.

The United States has tax treaties with a number of foreign countries, including Malta. Under these treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Thanks to the tax treaty with Malta, which was signed in 2008 and became effective in late 2010 (“Treaty”), it is the situs of a powerful offshore retirement solution for U.S. taxpayers known as the Malta Pension Plan (“Plan”).

What is a Malta Pension Plan?

Under Maltese law, the Plan is structured as a personal retirement benefits plan taking the form of a trust. The Plan is treated as a resident of Malta under Article 4 of the Treaty.
The Plan, like a Roth IRA, is funded with after-tax dollars. However, unlike a Roth IRA and other domestic retirement plans, the Plan has no income or contribution limitations, which can limit high-income earners. Contributions to the trust can be made with cash or with other assets through in-kind transfers. The ability to accept in-kind transfers allows diverse assets to fund the Plan, such as a portfolio of appreciated securities, real estate, passive business interests, artwork, collectibles and cryptocurrencies. Unlike U.S. retirement plans, a portion of Plan assets can be used to purchase life insurance, to invest in U.S. or foreign real estate and for-profit businesses without the negative tax consequences commonly associated with unrelated business income tax (UBIT).

If set up correctly, the Plan is eligible for Treaty benefits and certain distributions are not subject to Malta or U.S. income tax when made to a U.S. resident beneficiary. Since the trust is a foreign grantor trust, transfers of assets to the Plan are not taxable. Investment income earned within the Plan is not currently taxed. Additionally, the sale of appreciated assets within the Plan are also not currently taxable. For estate-planning purposes, all Plan assets are included in a participant’s taxable estate but may be distributed to a U.S. resident beneficiary without income taxation.

In the United States, accessing one’s retirement plan prior to age 59.5 comes with a 10 percent penalty unless you can meet one of a few exceptions (for example, disability). Maltese pension rules allow a participant to receive retirement benefits as early as age 50 without penalty. Payment of retirement benefits comes in lump sums or periodic distributions. Lump-sum distributions are not subject to taxation in Malta and therefore are not subject to taxation to a U.S. participant under Article 17(1) of the Treaty. A U.S. taxpayer is subject to taxation when receiving periodic payments under Internal Revenue Code Section 72, which governs annuity distributions, and Article 17(1)(b), which governs pensions.

From the Moon to Malta

Heritage Auctions recently auctioned a rare Apollo artifact. It had an estimated auction price of about $100,000 – but the piece ultimately sold for more than $2 million. It was one of the highest amounts paid at auction for space-exploration memorabilia. In a July 2019 Forbes article, editor Abram Brown stated that the record stands at $2.9 million, paid for a Russian spacecraft (Vostok 3KA-2) sold in 2011. It was used to launch a life-size mannequin and a living dog named “Little Star” successfully into space in 1961 before the first human spaceflight occurred that same year.

It was a big price tag to pay for the buyer and a big tax bill for the seller. However, the spacecraft could have been transferred into a Malta Pension Plan prior to the sale, and if done correctly, the benefits of such a transfer could have been astronomical.

The Malta Pension Plan in Action

Let us assume that the seller had sufficient non-retirement assets, but neglected to plan for retirement in a secure, tax-efficient vehicle. Let us also assume that the seller decides to fund his or her retirement using this asset, plus an additional $2 million in post-tax cash generated from prior collectible sales. For illustration purposes, we will assume that the spacecraft sold for $3 million and that the seller had a cost basis of zero. The seller could have set up his or her own Plan and made an in-kind nontaxable transfer of the asset to his or her Plan. Now let’s say the collectible was sold later that year, which would have normally generated a $3 million taxable gain. However, because the sale was done inside the Plan, Treaty benefits could have been available to exempt the gain from taxation, avoiding a $840,000 tax in the year of the sale.

Collectibles are tangible assets taxed at a higher long-term capital gains tax rate of 28 percent. When the pensioner turns 50, 30 percent of the pension account value, or $1.5 million, may be distributed as an initial lump sum free from Maltese or U.S. tax. The pensioner also could have received additional and optional tax-free distributions beginning three years after the initial lump-sum distribution. During this time, let’s say the remaining $3.5 million, invested in a U.S. brokerage account with a U.S. custodian, increases to $4 million. Under Maltese pension rules, the fund must retain a minimum notional amount of assets, which can provide sufficient lifetime retirement income and from which additional lump-sum distributions are calculated. Actuarial calculations using Maltese pension rules and IRS Table V determine that the Plan would need $2 million to meet the minimum lifetime-retirement needs for the now 53-yearold pensioner (three years after the time of the initial example). Because the pension assets are now worth $4 million in this example, there is $2 million more than needed to meet minimum lifetime-retirement needs. Up to 50 percent of that amount is available for an additional lump-sum distribution. Therefore, the pensioner could receive another tax-free, lump-sum distribution of $1 million from the Plan. Additional and optional tax-free lump sums may be distributed annually so long as the Plan retains an amount necessary to provide sufficient lifetime retirement income under the Maltese rules.

The Plan could have allowed the seller to (1) mitigate the capital gains tax associated with the sale of the coveted spacecraft; (2) defer all investment income and gains on the reinvestment of the sales proceeds and the additional cash funding; and (3) receive significant tax-free retirement income. Heritage Auctions Trusts & Estates Representative Deborah Daly remarks, “This great example perfectly highlights how Heritage Auctions is extremely well-positioned to help clients considering this retirement plan option. Not only do we have a deep bench of collectibles market experts to place the invested asset for sale, but our separate appraisal business can value the tangible for deposit to the pension trust, meeting all USPAP and IRS standards.”

Compared to U.S. retirement vehicles, it is hard to beat the utility and flexibility a Malta Pension Plan can provide. If it were the scene of another 007 film, that movie might just be called From Malta With Love.


Guest Contributors
Michael Schwartz, CFP®, AEP®; Michael Brown, Ron Deutsch, CFA®, MBA; Brian Flynn; Paul Hoerrner Jr., CFP®; Michael Tanney; and Travis Nelson, CFP®
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