Law Offices - Kenneth D. Sisco, Attorney - Personal Information
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Last Updated: July 1, 2007 E-Mail -- protect@action-assetprotection-services.com
OFFSHORE PLANNING SEMINAR -- Intensive examination of offshore planning and Asset Protection Techniques. DETAILS
CLICK HERE for The Ultimate Asset Protection Tool The ultimate strategy for utilizing foreign trusts, foreign corporations, private annuities, limited partnerships and more.Reduced Fees for Foreign Planning -- If you are interested in Foreign Trusts, Foreign Corporations, or foreign planning and strategies in general, and you are in a position to take action before August 6, 2007, you will be pleased to note that I am prepared to offer substantial fee reductions for foreign planning prior to that date. Please see Announcement |
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The Ultimate Estate Planning and Asset Protection ToolThere are forces at work today, that if allowed to proceed unchecked, will almost certainly result in drastic changes in the way we perceive ourselves, our neighbors, and our government. Clients have asked me to prepare a concise description of some of the many benefits and opportunities associated with dealing in foreign markets; and to explain why anyone would want to go offshore in the first place. At one time I did that, but the article became cumbersone to say the least, and some people found it offensive. I don't apologize for my political beliefs, but at the same time, I have no desire to rub anyone's nose in them. Persons with very different political views can find the information here very useful. On the other hand, if you are interested in knowing my politics, please see my article "The Road to Serfdom". For non tax reasons for moving assets offshore, political and otherwise, please see "Security and Privacy Through International Transactions". Once I have made the decision to go offshore with some of my assets, how do I go about doing it? Obviously, the easiest way to move funds offshore is to open a foreign bank account. While several advantages can be achieved in doing this, such as investment diversification, privacy and banking efficiency, this method has several shortcomings which will be discussed below. A second means for moving funds offshore, which has become very popular recently, is the purchase of a "Swiss Annuity." While these are excellent investments for some people, they too have serious shortcomings, especially for the unwary. These shortcomings are also discussed below. Finally, a somewhat more sophisticated route to holding assets offshore is the creation of a foreign corporation; but this too falls short of being the panacea for which so many have hoped. Many a person, thinking himself very clever, has set up a foreign corporation, only to slam face first into the Controlled Foreign Corporation (CFC) rules. At the risk of oversimplification, these rules provide that a CFC is a foreign corporation in which a U.S. Shareholder(s) own more than fifty percent of voting stock or more than fifty percent of the corporation's value. If the corporation is determined to be a CFC, its U.S. Shareholder(s) will be taxed on their proportional share of the corporation's income, even if that income is not distributed. Obviously, not the best of all worlds. On the other hand, this is no different than a domestic Sub-Chapter S corporation, that serves so many people so well, without the advantages of being offshore. The goals for which any comprehensive estate plan strives are asset protection, reduction of estate taxes, reduction of income taxes, and the accumulation of assets offshore. Unfortunately, unless one is willing to lie, cheat and play games, none of the above strategies will achieve any of these goals except the accumulation of assets offshore; which, of course, is not bad. It simply is not as good as we can do. Many people don't realize that assets held offshore, if they are held in your name or the name of your nominee, are still part of your taxable estate and are subject to creditors' claims. Of course, it is true that if you are willing and able to lie on Schedule B of your 1040 Income Tax return and on your estate tax return, then chances are, offshore assets will not be included in your estate and will not be taxed. Further, if you are willing and able to lie to a creditor, and tell him that you have no offshore assets, then chances are the creditor will not find those assets and they will be safe. Moreover, even if a creditor did find the offshore assets, neither the bank nor the Swiss Annuity company would respond to a U.S. demand to turn over the assets. The problem arises from the fact that a creditor would bring you before a judge, who would order you to "voluntarily" turn over the offshore assets. If you refused, you would be in contempt of court, and could go to jail. Peace of mind is one of the foremost reasons for developing a plan. For most people, to lie, cheat and play games would defeat that purpose and should be avoided. If you have a foreign bank account or a foreign corporation, it should be reported on your 1040 Form. Moreover, if you have any foreign assets, including bank accounts, annuities, or a corporation, and you are called into court for a Judgment Debtor's Examination, you should not perjure yourself, just to save yourself some money. If your offshore holdings are small, they aren't worth risking jail over. If your offshore holdings or potential offshore holdings are significant, you should consider the ultimate asset protection and estate planning tool. Almost everyone with the imagination to consider doing so, has been fascinated with the provisions of our tax law that exempt foreign persons and entities from the payment of United States income taxes. I believe the strategy described here not only achieves this goal, but all the other goals, including peace of mind. As with most good ideas, the solution is very simple. Essentially, it amounts to the creation of an irrevocable foreign trust, which if properly drawn, will be a non U.S. Person. The trust then forms a foreign corporation, which if properly formed, will not be a CFC. A. The inter vivos, non-grantor foreign trust.Trusts are distinguished by many different characteristics. There are inter vivos trusts, which means that the trust takes affect during the grantor's lifetime, as opposed to testamentary trusts, which don't take affect until the grantor's death. Moreover, there are revocable trusts, as opposed to irrevocable trusts. These terms are almost self explanatory. Revocable means the maker of the trust can revoke it any time he or she wants to; whereas an irrevocable trust cannot be revoked. Now we need to discuss grantor vs. non-grantor trusts. This is one of the more confusing characterizations because all trusts have a grantor, or settlor or trustor, all of which terms mean the same thing. But when we talk about grantor trusts vs. non-grantor trusts we are making the distinction as to the amount of control retained by the grantor, after the trust is in effect. The essential difference for our purposes is that a properly drawn, non-grantor foreign trust will provide income tax advantages that the grantor trust will not. The Internal Revenue Code provides very specific requirements as to how much control over the trust the grantor must give up in order for the trust to be a non-grantor trust and thereby achieve the tax advantages we are seeking. Prior to 1976, persons wishing to reduce their income taxes set up foreign trusts, very carefully following the rules for non-grantor trusts; and by doing so, almost magically, turned taxable income into non-taxable income. In 1976 congress passed new legislation that in effect said, "the old rules are fine for domestic trusts, but if you want to use a foreign trust you must comply with a few additional rules." Most practitioners were devastated, and believed that the use of foreign trusts as a tax saving strategy was over. At this point, I want to make two very important observations. First, there are many reasons to move assets offshore that have nothing to do with tax savings, not the least of which is privacy and asset protection. Second, and most important for our purposes, even when each of the additional requirements for foreign trusts are complied with, there is still enormous potential for tax savings. The most important conditions that must be fulfilled in order to qualify as a non-grantor foreign trust are that (1) the trust must be irrevocable (2) the trustee(s) must not be U.S. Citizens or U.S. Residents, and (3) the grantor's heirs must not be permitted to receive a distribution from the trust during the lifetime of the grantor. Each of these items raise concerns, but they are problems that are easily surmountable. 1. The trust must be irrevocable.Irrevocable trusts, whether domestic or foreign, are very common to achieve income tax, estate tax and asset protection advantages. "Irrevocable" simply means that the grantor cannot simply cancel the trust and take back the property he or she transferred to it. It does not mean that the trust cannot be terminated, or simply allowed to die when the trustee no longer has assets to administer. 2. The trustee(s) must not be U.S. Citizens or U.S. Residents.While having a foreign trustee makes administration more expensive and less convenient, it is certainly not a serious problem. There are persons all over the world, with impeccable credentials and reputations, that are perfectly willing to act as your trustee. Moreover, there is always a clause in the trust instrument that permits the trustee and the jurisdiction to be changed if the trustee is not administering the trust as was intended. Moreover, very recently, in Internal Revenue Service Revenue Ruling 95-58, the I.R.S. conceded that a trust instrument, foreign or otherwise, may contain a provision that allows the trustor to change the trustee of a trust without running the risk of having the trust characterized as a "grantor trust." 3. The grantor's heirs must not be permitted to Receive a distribution from the trust during the lifetime of the grantor.Again, this is more of an inconvenience than a genuine problem, since the heirs can receive loans and/or compensation from the trust. B. The foreign corporation (non-CFC).Once created and funded, the trust will capitalize a foreign corporation in return for stock. Ownership of the stock of the foreign corporation will be attributed to the beneficiaries of the foreign trust, but such ownership will be in proportion to their "actuarial interest," thus too small to bring the foreign corporation under the CFC rules. Once a Foreign Structure is in place, how is it put to use? A. Export/import business.For any person already involved in, or who would like to be involved in, any export/import business or other foreign business activity or investment, this strategy is difficult to improve upon. This area of the law is extremely complicated, and should be carefully analyzed on a venture by venture basis, to ensure compliance with the law. However, given the potential for tax savings and asset protection, the effort will likely be rewarded several times over. B. Private annuities.Assume that a married couple with an inter vivos revocable trust has an estate in excess of 1.3 million dollars, and are concerned that upon their deaths their estate will incur an estate tax of up to 50% of any excess over the 1.3 million dollars. One solution would be for the couple to purchase a private annuity from the foreign corporation. A private annuity is simply an agreement wherein one party transfers property to another party in exchange for its promise to pay a periodic payment for life to the transferring party. For example, the couple above could purchase a private annuity from a foreign corporation for $100,000 in exchange for the foreign corporation's promise to provide a monthly payment to the couple for as long as they live. The amounts of the payments would be calculated according to annuity tables provided by the Internal Revenue Service. Several advantages would be achieved by this strategy. First, the foreign corporation would have $100,000 with which to begin business or investment activity. Second, the couple's estate would be reduced by $100,000, thus reducing estate taxes and administration fees. Third, the couple's assets would be reduced by $100,000, limiting the effectiveness of any potential creditor. And finally, if the property transferred was income producing property, such as cash in a bank, income taxes would be reduced. C. Sale of receivables.Assume that the couple above are medical doctors, have $100,000 in accounts receivable in their medical practice, and are concerned that a creditor may try to attach those accounts. One solution would be for the couple to sell their receivables to the foreign corporation for $80,000. At least four advantages would be achieved by this strategy. First, the accounts receivable would be protected from creditors; second, future receivables and/or other assets could be encumbered to assure that the receivables transferred are good receivables; third, the couple's income would be reduced by $20,000, thus reducing income taxes; and finally, $20,000 would be moved to the foreign corporation for further business and investment purposes. D. Domestic Partnership Management AgreementFor those who have a Family Limited Partnership in place, or who are interested in setting one up, the following strategy may be of interest. The foreign corporation is made a General Partner of the Partnership and contractually becomes the Managing General Partner, deciding what investments to make, when distributions should be made, and the general direction of the Partnership. In return for these services the foreign corporation may receive a management fee, as well as, a percentage of the profits of the partnership. Routine, day to day activities of the Partnership may still be performed by the non-managing General Partner(s). By this time the advantages of this strategy are probably obvious. A great deal of asset protection and estate planning has already been achieved just by virtue of the Family Limited Partnership; but as the assets of the Partnership are paid over or distributed to the foreign corporation, even further advantage is gained. E. Loans from foreign corporation.Persons interested in protecting assets that would otherwise be subject to levy or attachment by creditors, may borrow funds from the foreign corporation. To guarantee repayment, the foreign corporation would demand that the loan be secured by virtually all the assets the borrower has, thereby making those assets unavailable, or at least very unattractive to a creditor. F. Equity share.Closely related to the strategy just discussed, is a transaction that has become more and more common in the tight money situation we have been living with the past several months. Persons might borrow from the foreign corporation against real estate already owned, or borrow from the foreign corporation to purchase additional real estate. In consideration of making the loan at all, and/or in consideration of a reduced interest rate, a borrower could agree to share any appreciation that occurs in the property. At least three advantages result from this sort of transaction. First, the property is severely damaged in its attractiveness to a potential creditor, since not only the amount borrowed is encumbered, but so is a portion of any appreciation that might have occurred. Second, income taxes are reduced by the amount of appreciation transferred to the foreign corporation. Third, and finally, funds are transferred to the foreign corporation for further business and investment purposes. Is the ultimate Asset Protection and Estate Planning Tool Legal? The Internal Revenue Service has had incredible success in convincing the general public that virtually anything that is an advantage to the citizen is therefore illegal. The average person believes that it is immoral, if not illegal, to have a foreign corporation. Almost everyone thinks it is illegal to transfer more than $10,000 per day out of the country. There is nothing illegal about a foreign trust or a foreign corporation; moreover, there is nothing illegal about transferring very large sums of money out of the country. What is illegal is to fail to report some of these activities. Everything we do will be fully reported as required, and in full compliance with the law. This essay was meant to be nothing more than an introductory overview of some of the strategies available to persons interested in protecting what they have, and reducing their taxes to the maximum extent possible under the law. It was certainly not intended to exhaust the entire topic. Indeed, there are numerous important concepts that were not even mentioned, much less fully explained. Some of these strategies, when fully explored, may turn out to be impractical or unsuitable for some persons. On the other hand, for those of you that do have property you want to protect; and for those of you who don't know exactly when you will die or be sued; and for those of you who believe you are not as protected as you would like to be, there is an old saying from the insurance industry that is appropriate here: "It is better to be twenty years too early, than one minute too late." Copyright ©1999 |
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